…for purposes of determining whether a Member has exceeded its
commitment levels, Base Total AMS, and the commitment levels resulting
or derived therefrom, are not themselves formulae to be worked out, but
simply absolute figures set out in the Schedule of the Member concerned.
As a result, Current Total AMS which is calculated according to Annex 3,
is compared to the commitment level for a given year that is already
specified as a given, absolute, figure in the Member’s Schedule.

Looking at the wording of Article 1(a)(ii) itself, it seems to us
that this provision attributes higher priority to “the provisions of
Annex 3” than to the “constituent data and methodology”. From the
viewpoint of ordinary meaning, the term “in accordance with”
reflects a more rigorous standard than the term “taking into account”.

In the circumstances of the present case, it is not necessary to
decide how a conflict between “the provisions of Annex 3” and the
“constituent data and methodology used in the tables of supporting
material incorporated by reference in Part IV of the Member’s Schedule”
would have to be resolved in principle. As the Panel has found, in this
case, there simply are no constituent data and methodology for beef.
Assuming arguendo that one would be justified — in spite of the
wording of Article 1(a)(ii) — to give priority to constituent data and
methodology used in the tables of supporting material over the guidance
of Annex 3, for products entering into the calculation of the Base Total
AMS, such a step would seem to us to be unwarranted in calculating
Current AMS for a product which did not enter into the Base Total
AMS calculation. …

…Correspondingly, a “subsidy” involves a transfer of economic
resources from the grantor to the recipient for less than full
consideration. As we said in our Report in Canada — Aircraft, a
“subsidy”, within the meaning of Article 1.1 of the SCM Agreement,
arises where the grantor makes a “financial contribution” which
confers a “benefit” on the recipient, as compared with what would
have been otherwise available to the recipient in the marketplace. …

Therefore, in this case, we will consider, first, whether the FSC
measure involves a transfer of economic resources by the grantor, which
in this dispute is the government of the United States, and, second,
whether any transfer of economic resources involves a benefit to the
recipient.

… We have rejected the United States’ appeal regarding the proper
characterization of the measure under Article 3.1(a) of the SCM
Agreement. The Panel held, and we have upheld, that the measure
involves the forgoing of revenues that are otherwise due under Article
1.1(a)(ii) of the SCM Agreement. As we indicated in US —
FSC, where a government forgoes revenues that are otherwise due
in relation to agricultural products, a subsidy may arise under the Agreement
on Agriculture.

The fiscal treatment of agricultural products, under the measure, is
not materially different from the fiscal treatment of products falling
within the scope of the SCM Agreement. Accordingly, we see no
reason to reach any conclusion under the Agreement on Agriculture that
differs from our conclusion under the SCM Agreement. …

The chapeau of Article 9.1 provides: “The following export
subsidies are subject to reduction commitments”. Hence, Article 9.1
sets forth a list of practices that, by definition, involve export
subsidies. In other words, a measure falling within Article 9.1 is
deemed to be an export subsidy within the meaning of Article 1(e) of the
Agreement on Agriculture. We observe that Article 9.1(c) requires
no independent enquiry into the existence of a “benefit”.

… We see no reason, and none has been pointed out to us, to read the
requirement of “contingent upon export performance” in the Agreement
on Agriculture differently from the same requirement imposed by the SCM
Agreement. The two Agreements use precisely the same words to define
“export subsidies”. Although there are differences between the
export subsidy disciplines established under the two Agreements, those
differences do not, in our view, affect the common substantive
requirement relating to export contingency. Therefore, we think it
appropriate to apply the interpretation of export contingency that we
have adopted under the SCM Agreement to the interpretation of
export contingency under the Agreement on Agriculture. …

Although an export subsidy granted to agricultural products must be
examined, in the first place, under the Agreement on Agriculture,
we find it appropriate, as has the Appellate Body in previous disputes,
to rely on the SCM Agreement for guidance in interpreting
provisions of the Agreement on Agriculture. Thus, we consider the
export-contingency requirement in Article 1(e) of the Agreement on
Agriculture having regard to that same requirement contained in
Article 3.1(a) of the SCM Agreement.

In sum, we agree with the Panel’s view that Step 2 payments are
export-contingent and, therefore, an export subsidy for purposes of
Article 9 of the Agreement onAgriculture and Article
3.1(a) of the SCM Agreement. The statute and regulations pursuant
to which Step 2 payments are granted, on their face, condition payments
to exporters on exportation. In order to claim payment, an exporter must
show proof of exportation. If an exporter does not provide proof of
exportation, the exporter will not receive a payment. This is sufficient
to establish that Step 2 payments to exporters of United States upland
cotton are “conditional upon export performance” or “dependent for
their existence on export performance”. That domestic users may also
be eligible to receive payments under different conditions does not
eliminate the fact that an exporter will receive payment only upon proof
of exportation.

… Article 1(e) of the Agreement on Agriculture defines “export
subsidies” as “subsidies contingent upon export performance, including
the export subsidies listed in Article 9 of this Agreement”
(emphasis added). The use of the word “including” suggests that the
term “export subsidies” should be interpreted broadly and that the
list of export subsidies in Article 9 is not exhaustive. Even though an
export credit guarantee may not necessarily include a subsidy component,
there is nothing inherent about export credit guarantees that precludes
such measures from falling within the definition of a subsidy. An export
credit guarantee that meets the definition of an export subsidy would be
covered by Article 10.1 of the Agreement on Agriculture because
it is not an export subsidy listed in Article 9.1 of that Agreement.

A preliminary question for our consideration is what rules apply in
interpreting export subsidy commitments specified in a Member’s
Schedule under the Agreement on Agriculture. We observe that
Article II:7 of the General Agreement on Tariffs and Trade 1994 (the
“GATT 1994”) provides that the “Schedules annexed to this
Agreement are hereby made an integral part of Part I of this Agreement.”
Furthermore, Article 3.1 of the Agreement on Agriculture provides
that “export subsidy commitments in Part IV of each Member’s
Schedule … are hereby made an integral part of [the] GATT 1994”.

The applicable rules for interpreting the provisions of the GATT 1994
are the “customary rules of interpretation of public international law”.
The Appellate Body has held that these rules are codified in the Vienna
Convention on the Law of Treaties (the “Vienna Convention”).
As provisions of a Member’s Schedule are “part of the terms of the
treaty”, they are subject to these same rules of treaty interpretation. …

… We do not see Article 3.1 as permitting a Member to limit
subsidization to whatever commitment it chooses to specify in its
Schedule without regard to Members’ obligations under the Agreement
on Agriculture. Rather, with respect to export subsidy commitments,
we see Article 3.1 as requiring a Member to limit its subsidization to
the budgetary outlay and quantity reduction commitments specified in its
Schedule in accordance with the provisions of the Agreement on
Agriculture. …

As regards scheduled products, when the specific reduction
commitment levels have been reached, the limited authorization to
provide export subsidies as listed in Article 9.1 is transformed,
effectively, into a prohibition against the provision of those
subsidies. …

A.1.5A Article 3.3 — “budgetary outlay and quantity commitment
levels” back to top

By its terms, Article 3.3 of the Agreement on Agriculture prohibits
the granting of export subsidies (listed in Article 9.1) in excess of
the budgetary outlay and quantity commitment levels specified in
a Member’s Schedule. Article 3.3 does not, however, explicitly state
that export subsidy commitments must be specified in a Member’s
Schedule in terms of both budgetary outlay and quantity
commitment levels. At the same time, Article 3.3 does not explicitly
state that a Member may specify its commitment level in terms of either
of the two forms of commitments. In our view, the use of the conjunctive
“and”, and the corresponding use of the word “levels” in the
plural, suggest that the drafters of the Agreement intended that both
types of commitments must be specified in a Member’s Schedule in
respect of any export subsidy listed in Article 9.1. Had the drafters
intended that a Member could specify one or the other of the two forms
of commitments, they would have chosen the disjunctive “or” and
correspondingly used the word “level” in the singular. Given the
choice, Members would choose only one or the other type of commitment,
but not both, so as to minimize their obligations. Therefore, it appears
to us that the drafters intended to ensure that export subsidy
commitments are specified in Members’ Schedules in terms of both
budgetary outlay and quantity commitments, by using the word “and”
as well as the word “levels” in the text of Article 3.3.

We find contextual support for the above interpretation in Article
9.2(b)(iv) of the Agreement on Agriculture, which provides:

(iv) the Member’s budgetary outlays for export subsidies and the
quantities benefiting from such subsidies, at the conclusion of the
implementation period, are no greater than 64 per cent and 79 per cent
of the 1986-1990 base period levels, respectively. For developing
country Members these percentages shall be 76 and 86 per cent,
respectively.

This provision prescribes the export subsidy commitment levels to be
reached at the conclusion of the implementation period (and to be
maintained thereafter), and those commitment levels are expressed in
terms of both budgetary outlays and quantities. We do not see how a
Member could comply with Article 9.2(b)(iv), or for that matter Article
9.2(a), without having specified its export subsidy commitments in terms
of both budgetary outlays and quantities. We also consider it
significant that both Article 9.2(b)(iii) and Article 9.2(b)(iv) use the
expression “budgetary outlays for export subsidies and the quantities benefiting
from such subsidies” (emphasis added). This shows the drafters’
recognition of the need to address the budgetary outlays and quantities
together.

Our interpretation that Article 3.3 (as well as Article 9.2) requires
that export subsidy commitments in a Member’s Schedule must be
expressed in terms of both budgetary outlay and quantity commitment
levels is also in consonance with the object and purpose of the Agreement
on Agriculture. We note, as did the Panel, that the third paragraph
of the Preamble to the Agreement recognizes that the “long-term
objective” of WTO Members, in initiating a reform process to deal with
the distortions in the world agricultural markets, is “to provide for
substantial progressive reductions in agricultural support and
protection”. Pursuant to this objective, the fourth paragraph of the
Preamble expresses the commitment of the WTO Members “to achieving
binding commitments” in the three specified areas, including “export
competition”. An interpretation that export subsidy commitments must
be expressed in a Member’s Schedule in terms of both budgetary outlay
and quantity commitment levels is more in harmony with the objectives
stated in the Preamble to the Agreement than an interpretation that a
Member is only obliged to fulfil “whatever commitments” it chooses
to specify in its Schedule.

We are also of the view that if an export subsidy commitment were
allowed to be specified in only one form, budgetary outlay or quantity,
as a Member may choose, and its conformity were measured on the basis of
that one commitment alone, it would undermine the export subsidy
disciplines of the Agreement on Agriculture. As we noted above,
the drafters recognized the need to deal with budgetary outlays and
quantities together in order to restrain subsidized exports. A
commitment on budgetary outlay alone provides little predictability on
export quantities, while a commitment on quantity alone could lead to
subsidized exports taking place that would otherwise have not taken
place but for the budgetary support. This is especially so given that
the Agreement on Agriculture has initiated a reform process in an
environment of high levels of export subsidies taking the form of
budgetary outlays and quantities. …

…we agree with the Panel that Article 3.3 requires a Member to
schedule both budgetary outlay and quantity commitment levels in respect
of export subsidies listed in Article 9.1 of the Agreement on
Agriculture. …

A.1.6 Articles 3.3 and 10.1 — “export subsidy commitments”
back to top

Under Article 3, Members have undertaken two different types of “export
subsidy commitments”. Under the first clause of Article 3.3, Members
have made a commitment that they will not “provide export subsidies
listed in paragraph 1 of Article 9 in respect of the agricultural
products or groups of products specified in Section II of Part IV of its
Schedule in excess of the budgetary outlay and quantity commitments
levels specified therein”. …

Under the second clause of Article 3.3, Members have committed not
to provide any export subsidies, listed in Article 9.1,
with respect to unscheduled agricultural products. This clause
clearly also involves “export subsidy commitments” within the
meaning of Article 10.1. …

… The term “export subsidy commitments” has a wider reach that
covers commitments and obligations relating to both scheduled and
unscheduled agricultural products.

… we examine whether the claimed commitment in Footnote 1 “limiting”
subsidization of exports of sugar can prevail over the provisions of the
Agreement on Agriculture, despite such a commitment being
inconsistent with Articles 3.3 and 9.1 of the Agreement on
Agriculture. …

… Footnote 1, being part of the European Communities’ Schedule, is
an integral part of the GATT 1994 by virtue of Article 3.1 of the Agreement
on Agriculture. Therefore, pursuant to Article 21 of the Agreement
on Agriculture, the provisions of the Agreement on Agriculture prevail
over Footnote 1. …

… we turn now to Article 4, which is the main provision of Part III
of the Agreement on Agriculture. As its title indicates, Article
4 deals with “Market Access”. During the course of the Uruguay
Round, negotiators identified certain border measures which have in
common that they restrict the volume or distort the price of imports of
agricultural products. The negotiators decided that these border
measures should be converted into ordinary customs duties, with a view
to ensuring enhanced market access for such imports. Thus, they
envisioned that ordinary customs duties would, in principle, become the
only form of border protection. As ordinary customs duties are more
transparent and more easily quantifiable than non-tariff barriers, they
are also more easily compared between trading partners, and thus the
maximum amount of such duties can be more easily reduced in future
multilateral trade negotiations. The Uruguay Round negotiators agreed
that market access would be improved — both in the short term and in
the long term — through bindings and reductions of tariffs and minimum
access requirements, which were to be recorded in Members’ Schedules.

Market access concessions contained in Schedules relate to
bindings and reductions of tariffs, and to other market access
commitments as specified therein.

In our view, Article 4.1 does more than merely indicate where market
access concessions and commitments for agricultural products are to be
found. Article 4.1 acknowledges that significant, new market access
concessions, in the form of new bindings and reductions of tariffs as
well as other market access commitments (i.e. those made as a result of
the tariffication process), were made as a result of the Uruguay Round
negotiations on agriculture and included in Members’ GATT 1994
Schedules. These concessions are fundamental to the agricultural reform
process that is a fundamental objective of the Agreement on
Agriculture.

… we do not see anything in Article 4.1 to suggest that market
access concessions and commitments made as a result of the Uruguay Round
negotiations on agriculture can be inconsistent with the provisions of
Article XIII of the GATT 1994. There is nothing in Articles 4.1 or 4.2,
or in any other article of the Agreement on Agriculture, that
deals specifically with the allocation of tariff quotas on agricultural
products. …

Our approach in this case is consistent with the Appellate Body’s
approach in EC — Bananas III. In that case, the European
Communities relied on Article 4.1 of the Agreement on Agriculture in
arguing that the market access concessions it made for agricultural
products pursuant to the Agreement on Agriculture prevailed over
Article XIII of the GATT 1994. The Appellate Body, however, found that
“[t]here is nothing in Articles 4.1 or 4.2, or in any other article of
the Agreement on Agriculture, that deals specifically with the
allocation of tariff quotas on agricultural products”. It further
explained that “[i]f the negotiators had intended to permit Members to
act inconsistently with Article XIII of the GATT 1994, they would have
said so explicitly”. The situation before us is similar. We have found
nothing in Article 6.3, paragraph 7 of Annex 3 or anywhere else in the Agreement
on Agriculture that “deals specifically” with subsidies that are
contingent on the use of domestic over imported agricultural products.

A.1.9 Article 4.2 and footnote 1 — Conversion of certain border
measures into ordinary customs duties back to top

… Article 4.2 of the Agreement on Agriculture should be
interpreted in a way that gives meaning to the use of the present
perfect tense in that provision — particularly in the light of the
fact that most of the other obligations in the Agreement on
Agriculture and in the other covered agreements are expressed in the
present, and not in the present perfect, tense. In general, requirements
expressed in the present perfect tense impose obligations that came into
being in the past, but may continue to apply at present. As used in
Article 4.2, this temporal connotation relates to the date by which Members
had to convert measures covered by Article 4.2 into ordinary customs
duties, as well as to the date from which Members had to refrain
from maintaining, reverting to, or resorting to, measures prohibited by
Article 4.2. The conversion into ordinary customs duties of measures
within the meaning of Article 4.2 began during the Uruguay Round
multilateral trade negotiations, because ordinary customs duties that
were to “compensate” for and replace converted border measures were
to be recorded in Members’ draft WTO Schedules the conclusion of
those negotiations. These draft Schedules, in turn, had to be verified
before the signing of the WTO Agreement on 15 April 1994.
Thereafter, there was no longer an option to replace measures covered by
Article 4.2 with ordinary customs duties in excess of the levels of
previously bound tariff rates. Moreover, as of the date of entry into
force of the WTO Agreement on 1 January 1995, Members are
required not to “maintain, revert to, or resort to” measures covered
by Article 4.2 of the Agreement on Agriculture.

If Article 4.2 were to read “any measures of the kind which are required
to be converted”, this would imply that if a Member — for whatever
reason — had failed, by the end of the Uruguay Round negotiations, to
convert a measure within the meaning of Article 4.2, it could, even
today, replace that measure with ordinary customs duties in excess
of bound tariff rates. But, as Chile and Argentina have agreed, this is
clearly not so. It seems to us that Article 4.2 was drafted in the
present perfect tense to ensure that measures that were required to be
converted as a result of the Uruguay Round — but were not converted —
could not be maintained, by virtue of that Article, from the date of
the entry into force of the WTO Agreement on 1 January 1995.

Thus, contrary to what Chile argues, giving meaning and effect to the
use of the present perfect tense in the phrase “have been required”
does not suggest that the scope of the phrase “any measures of the
kind which have been required to be converted into ordinary customs
duties” must be limited only to those measures which were actually converted,
or were requested to be converted, into ordinary customs duties
by the end of the Uruguay Round. Indeed, in our view, such an
interpretation would fail to give meaning and effect to the word “any”
and the phrase “of the kind”, which are descriptive of the
word “measures” in that provision. A plain reading of these words
suggests that the drafters intended to cover a broad category of
measures. We do not see how proper meaning and effect could be accorded
to the word “any” and the phrase “of the kind” in Article 4.2 if
that provision were read to include only those specific measures that
were singled out to be converted into ordinary customs duties by
negotiating partners in the course of the Uruguay Round.

The wording of footnote 1 to the Agreement on Agriculture confirms
our interpretation. … the use of the word “include” in the footnote
indicates that the list of measures is illustrative, not exhaustive.
And, clearly, the existence of footnote 1 suggests that there will be
“measures of the kind which have been required to be converted” that
were not specifically identified during the Uruguay Round
negotiations. …

Article 4.2 speaks of “measures of the kind which have been
required to be converted into ordinary customs duties”. The
word “convert” means “undergo transformation”. The word “converted”
connotes “changed in their nature”, “turned into something
different”. Thus, “measures which have been required to be converted
into ordinary customs duties” had to be transformed into something
they were not — namely, ordinary customs duties. The following example
illustrates this point. The application of a “variable import levy”,
or a “minimum import price”, as the terms are used in footnote 1,
can result in the levying of a specific duty equal to the difference
between a reference price and a target price, or minimum price. These
resulting levies or specific duties take the same form as
ordinary customs duties. However, the mere fact that a duty imposed on
an import at the border is in the same form as an ordinary
customs duty, does not mean that it is not a “variable import
levy” or a “minimum import price”. Clearly, as measures listed in
footnote 1, “variable import levies” and “minimum import prices”
had to be converted into ordinary customs duties by the end of
the Uruguay Round. The mere fact that such measures result in the
payment of duties does not exonerate a Member from the requirement not
to maintain, resort to, or revert to those measures.

… we disagree with the Panel’s definition of “ordinary customs
duties” and, therefore, we reverse the Panel’s finding, in
paragraph 7.52 of the Panel Report, that the term “ordinary customs
duty”, as used in Article 4.2 of the Agreement on Agriculture,
is to be understood as “referring to a customs duty which is not
applied to factors of an exogenous nature”.

Footnote 1 provides a non-exhaustive list of the measures that are
covered by the obligation under Article 4.2. The various border measures
identified in footnote 1 have different forms and structures and apply
to imports in different ways. Yet, these measures “have in common that
they restrict the volume or distort the price of imports of agricultural
products” and, therefore, frustrate a key objective of the Agreement
on Agriculture — to achieve improved market access conditions for
imports of agricultural products by permitting only the application of
ordinary customs duties. Some of the measures specifically identified in
footnote 1 entail the payment of duties at the border, while others do
not. The mere fact that a measure results in the payment of
duties that take the same form as ordinary customs duties does
not, alone, mean that the measure falls outside the scope of
footnote 1. Thus, in order to ascertain whether a measure is among the
“measures of the kind which have been required to be converted into
ordinary customs duties”, it is necessary to conduct an in-depth
examination of the measure itself. Such an examination must take due
account of the scope and meaning of the relevant language in footnote 1.

The term “minimum import price” refers generally to the lowest
price at which imports of a certain product may enter a Member’s
domestic market. Here, too, no definition has been provided by the
drafters of the Agreement on Agriculture. However, the Panel
described “minimum import prices” as follows:

[these] schemes generally operate in relation to the actual
transaction value of the imports. If the price of an individual
consignment is below a specified minimum import price, an additional
charge is imposed corresponding to the difference.

The Panel also said that minimum import prices “are generally not
dissimilar from variable import levies in many respects, including in
terms of their protective and stabilization effects, but that their mode
of operation is generally less complicated.” The main difference
between minimum import prices and variable import levies is, according
to the Panel, that “variable import levies are generally based on the
difference between the governmentally determined threshold and
the lowest world market offer price for the product concerned, while
minimum import price schemes generally operate in relation to the actual
transaction value of the imports” (emphasis added).

… The entry price of any given shipment depends not only on the
specific duty applied, if any, but also on the c.i.f. transaction value
and the ad valorem tariff applied to that c.i.f. value. This does
not mean, as Chile’s arguments imply, that the lower band threshold
has nothing to do with the resulting level of entry prices. Because any
specific duty is applied on the basis of the difference between the
lower band threshold and the reference price, the lower threshold is an
indispensable factor in determining the magnitude of the specific duty.… Even if the lower threshold of the measure at issue does not serve as a
target domestic price per se, it does serve the function of
ensuring that, the more the reference prices fall below that lower
threshold, the higher the specific duties imposed will be. This is
accompanied by a high likelihood that the corresponding entry price in
the Chilean market will be higher than that threshold. Thus, the fact
that the lower band threshold was expressed on an f.o.b. basis indicates
that the measure at issue is not “identical” to a minimum import
price but does not, in and of itself, preclude a finding that the
measure at issue is “similar” to a minimum import price.

… In our view, it is primarily the periods in which the reference
price is below the lower band threshold that will be the most relevant
to the assessment of whether the effects of the measure at issue are
similar to the effects of a minimum import price. …

In sum, the measure at issue shares the following characteristics
with a minimum import price scheme, all of which were also
characteristics exhibited by the original price band system: (i) when a
reference price applicable to a shipment falls below a specified level
(the lower band threshold), an additional specific duty is imposed on
the basis of the difference between those two parameters; (ii) due to
the operation of the measure, it is highly improbable that the entry
prices of wheat and wheat flour in the Chilean market will fall below
the lower band threshold; (iii) the lower band threshold operates, at
least to a degree, as a proxy or substitute for domestic target prices;
(iv) the lower the reference price relative to the lower band threshold,
the higher the specific duty and the greater its protective effects; and
(v) the measure distorts the transmission of declines in world prices to
the domestic market. Notwithstanding certain dissimilarities between the
measure at issue and a minimum import price scheme,280 which were
also present in the original price band system, the overall nature of
the measure at issue, including its design and structure, and the way it
operates, are sufficiently “similar” to a minimum import price to
make it, as the Panel found, a prohibited border measure within the
meaning of footnote 1 to Article 4.2.

A.1.12 Article 4.2 and footnote 1 — Similar border measures other
than ordinary customs duties back to top

We agree with the first part of the Panel’s definition of the term
“similar” as “having a resemblance or likeness”, “of the same
nature or kind”, and “having characteristics in common”. …The
better and appropriate approach is to determine similarity by asking the
question whether two or more things have likeness or resemblance
sufficient to be similar to each other. In our view, the task of
determining whether something is similar to something else must be
approached on an empirical basis.

A third category of measures defined in footnote 1 as subject to the
obligation in Article 4.2 of the Agreement on Agriculture is that
of “similar border measures other than ordinary customs duties”. In
the original proceedings, the Appellate Body endorsed the original panel’s
definition of the term “similar” as “having a resemblance or
likeness”, “of the same nature or kind”, and “having
characteristics in common”. Similarity must be determined by
undertaking a comparative analysis between an actual measure and one or
more of the measures explicitly listed in footnote 1, and such a task
“must be approached on an empirical basis”. The Appellate Body
observed that all of the border measures expressly mentioned in footnote
1 “have in common the object and effect of restricting the volumes,
and distorting the prices, of imports of agricultural products in ways
different from the ways that ordinary customs duties do”. A measure
need not be identical to one of the prohibited categories of
measures listed in footnote 1 to fall nevertheless within the scope of
that provision. Rather, as the Appellate Body explained, in order to be
a “similar border measure” within the meaning of footnote 1, a
measure must, “in its specific factual configuration”, have “sufficient
‘resemblance or likeness to’, or be ‘of the same nature or kind’
as, at least one of the specific categories of measures listed in
footnote 1”.

As regards the words “ordinary customs duties” in footnote 1, …
the
mere fact that the duties resulting from the application of a measure
take the form of ad valorem or specific rates, or are calculated
on the basis of the value and/or volume of imports, does not, alone,
imply that the underlying measure or scheme constitutes ordinary customs
duties and cannot be similar to one of the categories of measures
explicitly identified in footnote 1.

… an examination of “similarity” cannot be made in the abstract:
it necessarily involves a comparative analysis. That analysis can
be undertaken by comparing the measure at issue with at least one of the
listed measures which, by definition, have characteristics different
from the characteristics of an ordinary customs duty. The term “ordinary
customs duties” in footnote 1 forms part of the phrase “similar
border measures other than ordinary customs duties”. This phrase
contains no punctuation, which suggests that the phrase as a whole
defines a relevant concept for purposes of footnote 1. As we see it, “other
than ordinary customs duties” is an adjectival phrase that qualifies
the term “similar border measures”. This language will, therefore,
inform a panel’s analysis of whether a measure is “similar” to one
of the categories of measures listed in footnote 1. We observe, as well,
that the structure and logic of footnote 1 make clear that variable
import levies and minimum import prices cannot be ordinary customs
duties. The same is true for border measures similar to variable import
levies and to minimum import prices.

… the Panel undertook no separate inquiry into whether the measure
at issue was “other than ordinary customs duties”. Instead, after
finding that the measure at issue was similar to a variable import levy
and to a minimum import price, the Panel simply added that, “[a]s
such, it is not an ordinary customs duty.” The Panel’s approach
differs in this regard from that of the original panel, which did
conduct a separate analysis of the phrase “other than ordinary customs
duties” and, on the basis of that analysis, found that the
characteristics of the original price band system differed from the
characteristics of “ordinary customs duties”.

The Panel’s approach is, however, consistent with the approach
taken by the Appellate Body in the original proceedings. Having reversed
the original panel’s definition of “ordinary customs duties”, the
Appellate Body made no separate finding as to whether the original
measure was “other than ordinary customs duties”.

… Thus, the original measure was characterized as a “similar
border measure other than ordinary customs duties”, even in the
absence of a separate finding that it was “other than ordinary customs
duties”.

… we are of the view that inconsistency with Article 4.2 can be
established when it is shown that a measure is a border measure similar
to one of the measures explicitly identified in footnote 1. A separate
analysis of whether, or an additional demonstration that, the measure is
“other than ordinary customs duties” may also be undertaken to
confirm such a finding. However, these are not indispensable for
reaching a conclusion on the categories listed in footnote 1.

… [In the original proceedings] the Appellate Body agreed with the
original panel that an examination of similarity involved a comparison
of two things and an assessment of the characteristics that they share.
The Appellate Body disagreed, however, with the original panel’s
additional observation that, in order for two things to be similar, they
must share some but not all “fundamental characteristics”, and that
a “border measure should therefore have some fundamental
characteristics in common with one or more of the measures explicitly
listed in footnote 1”. …

… in advocating that the issue of similarity be approached “on an
empirical basis”, the Appellate Body was contrasting this to, and
counselling against, an approach that focused on the fundamental
nature of the shared characteristics. The proper approach should,
instead, entail both an analysis of the extent of such shared
characteristics and a determination of whether these are sufficient to
render the two things similar. Such characteristics can be identified
from an analysis of both the structure and design of a measure as
well as the effects of that measure. Thus, we do not consider that the
Panel would have needed, as Chile’s argument seems to imply, to focus
its examination primarily on numerical or statistical data
regarding the effects of that measure in practice. Where it exists,
evidence on the observable effects of the measure should, obviously, be
taken into consideration, along with information on the structure and
design of the measure. The weight and significance to be accorded to
such evidence will, as is the case with any evidence, depend on the
circumstances of the case.

A.1.13 Article 4.2 and footnote 1 — Variable import levies
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To determine what kind of variability makes an import levy a
“variable import levy”, we turn to the immediate context of the
other words in footnote 1. The term “variable import levies” appears
after the introductory phrase “[t]hese measures include”.
Article 4.2 — to which the footnote is attached — also speaks of “measures”.
This suggests that at least one feature of “variable import levies”
is the fact that the measure itself — as a mechanism — must
impose the variability of the duties. Variability is inherent in
a measure if the measure incorporates a scheme or formula that causes
and ensures that levies change automatically and continuously. Ordinary
customs duties, by contrast, are subject to discrete changes in applied
tariff rates that occur independently, and unrelated to such an
underlying scheme or formula. The level at which ordinary customs duties
are applied can be varied by a legislature, but such duties will
not be automatically and continuously variable. To vary the
applied rate of duty in the case of ordinary customs duties will always
require separate legislative or administrative action, whereas
the ordinary meaning of the term “variable” implies that no such
action is required.

However, in our view, the presence of a formula causing automatic and
continuous variability of duties is a necessary, but by no means
a sufficient, condition for a particular measure to be a “variable
import levy” within the meaning of footnote 1. “Variable import
levies” have additional features that undermine the object and purpose
of Article 4, which is to achieve improved market access conditions for
imports of agricultural products by permitting only the application of
ordinary customs duties. These additional features include a lack of
transparency and a lack of predictability in the level of duties that
will result from such measures. This lack of transparency and this lack
of predictability are liable to restrict the volume of imports. As
Argentina points out, an exporter is less likely to ship to a market if
that exporter does not know and cannot reasonably predict what the
amount of duties will be. …

… we find nothing in Article 4.2 to suggest that a measure
prohibited by that provision would be rendered consistent with it if
applied with a cap. Before the conclusion of the Uruguay Round, a
measure could be recognized as a “variable import levy” even if the
products to which the measure applied were subject to tariff bindings.
And, there is nothing in the text of Article 4.2 to indicate that a
measure, which was recognized as a “variable import levy” before the
Uruguay Round, is exempt from the requirements of Article 4.2 simply
because tariffs on some, or all, of the products to which that measure now
applies were bound as a result of the Uruguay Round.

… as the Appellate Body found, “variable import levies” are
measures which themselves — as a mechanism — impose the variability
of the duties, that is, measures that are “inherently” variable
because they “incorporate … a scheme or formula that causes
and ensures that levies change automatically and continuously”. The
presence of this underlying formula distinguishes variable import levies
from ordinary customs duties, which are also subject to variation, but
through discrete changes in applied tariff rates that occur
independently and as a result of separate administrative or legislative
action.

The Appellate Body further observed that variable import levies are
characterized by certain additional features which include “a lack of
transparency and a lack of predictability in the level of duties that
will result from such measures”. In making this statement, the
Appellate Body was not identifying a “lack of transparency” and a
“lack of predictability” as independent or absolute characteristics
that a measure must display in order to be considered a variable import
levy. Rather, the Appellate Body was simply explaining that the level of
duties generated by variable import levies is less transparent and less
predictable than is the case with ordinary customs duties. Thus, the
Appellate Body considered transparency and predictability in tandem and
in relation to the level of resulting duties, observing that “an
exporter is less likely to ship to a market if that exporter does not
know and cannot reasonably predict what the amount of duties will be”.
This is why variable import levies are “liable to restrict the volume
of imports”. In addition, they “contribute to distorting the prices
of imports by impeding the transmission of international prices to the
domestic market”.

Chile contends that the Panel erred in attributing meaning to the
word “variable” that did not accord in two ways with the meaning
identified by the Appellate Body in the original proceedings: (i) in
finding that a measure constitutes a variable import levy merely because
the measure makes it likely or possible that resulting duties
will change continuously; and (ii) in finding that “periodic
variability” is equivalent to the automatic and continuous variability
that is emblematic of variable import levies. …

On the first point, … [w]e consider that the Panel properly
recognized that measures containing underlying formulas, which produce
automatic changes in duties, display the same type of “inherent
variability” that characterizes variable import levies.

Secondly, … [t]he Panel did not equate periodic change with
automatic and continuous change. Rather, it defined an inherently
variable measure as one that causes and ensures automatic and continuous
changes in duty levels, and properly recognized that a measure produces
such automatic changes when it incorporates an underlying scheme or
formula. … Moreover, although we need not resolve the issue here, it
does not seem to us that the concepts of “periodic change”, on the
one hand, and “automatic and continuous change”, on the other hand,
are necessarily mutually exclusive, as Chile asserts.225

As our interpretation of footnote 1 above has shown, the frequency of
change effected by a measure may be relevant in determining whether it
is “variable”. However, this criterion is not determinative in and
of itself. No specific frequency of change in resulting duties is
required in order for a measure to be considered “variable” within
the meaning of footnote 1. That a measure produces duties that vary with
every transaction is not a necessary condition for a measure to
be “variable”. Rather, “variability” must be assessed on the
basis of the overall configuration of a measure and the interaction of
its specific features. Thus, although the measure at issue involves less
frequent changes in duties than the original price band system, the
frequency of change is but one of the features to be considered in an
assessment of the “variability” of the measure at issue. That
assessment must also take account of the extent to which the changes are
automatic and based on an underlying mechanism or formula.

As a preliminary matter, we note that … Chile seems to assign
too prominent a role to these “additional features”. In the original proceedings, … the Appellate Body remarked that variable import levies
have additional features that undermine one of the objectives of the Agreement
on Agriculture, namely, to improve market access conditions for
imports of agricultural products by permitting the application of only
ordinary customs duties. The Appellate Body observed that these
additional features “include a lack of transparency and a lack of
predictability in the level of duties that will result from such
measures” that “are liable to restrict the volume of imports” and
which “will also contribute to distorting the prices of imports by
impeding the transmission of international prices to the domestic market”.

The Appellate Body thus envisaged that an analysis of the “additional
features” that make a “variable” duty a “variable import levy”
within the meaning of footnote 1 would be undertaken in the light of the
function of that provision — to enhance market access for agricultural
products. …

… Chile contests various aspects of the Panel’s reasoning
explaining why, in the Panel’s view, both the reference price and the
band thresholds lacked transparency. To an extent, Chile’s arguments
rest on the mistaken assumption that “transparency” is an
independent criterion that, if satisfied, conclusively establishes that
a measure cannot be similar to a variable import levy. As we have seen,
this is not the case. Moreover, in the original proceedings, the
Appellate Body analysed “transparency” in tandem with the
predictability of the level of the duties resulting from the operation
of the original price band system.

It is true that Chile has enacted certain modifications that render
the measure at issue more transparent than the original price band
system, …Yet, in its analysis of additional features of the measure at
issue, the issue before the Panel was how those modifications affected
the transparency and predictability of the levels of duties resulting
from the measure at issue, in particular, as compared to variable import
levies. In examining this issue, the Panel expressed the view that, … in
general, the use of a reference price “entails a systematic lack of
transparency and predictability”, particularly when the reference
price is periodically determined and constantly changing, and detached
from the transaction value, volume, and origin of a shipment. We believe
that the Panel did not err in finding that the measure at issue lacks
transparency and predictability even though the system of fixing the
reference price is more transparent than was the case under the original
price band system, and the band thresholds are now pre-determined and
known in advance.

We are, however, concerned by certain aspects of the Panel’s
analysis of transparency. For example, the Panel found that the
reference price lacked transparency because it was insufficiently
representative of world market prices. In so finding, the Panel seems to
have used transparency as an independent criterion, rather than
examining, as it should have done, whether the various elements of the
measure at issue in their interaction and configuration are sufficiently
transparent to enable traders to anticipate their duty liability.
Overall, however, we do not think that these concerns materially affect
the analysis undertaken by the Panel, or vitiate its conclusions.

In sum, the measure at issue shares the following characteristics
with variable import levies, all of which were also characteristics
exhibited by the original price band system: (i) when an
administratively determined reference price falls below a specified
threshold, an additional charge is imposed on the basis of the
difference between these two parameters; (ii) the amount of any specific
duty automatically changes in response to movements in either or both of
these parameters; (iii) it is highly improbable that the entry prices of
wheat and wheat flour in the Chilean market will fall below the lower
band threshold; (iv) the lower the reference price relative to the lower
band threshold, the higher the specific duty and the greater its
protective effects; and (v) the mode of operation of the measure
compromises the transparency and predictability of the resulting duties
and distorts the transmission of declines in world prices to the
domestic market. As the Panel found, the measure at issue, in its
overall nature, design and structure, and the way it operates, is “similar”
to a variable import levy.

… we interpret the “price at which the product concerned may enter
the customs territory of the Member granting the concession, as
determined on the basis of the c.i.f. import price” in Article 5.1(b)
as the c.i.f. import price not including ordinary customs duties. …

… neither the text nor the context of Article 5.5 of the Agreement
on Agriculture permits us to conclude that the additional duties
imposed under the special safeguard mechanism in Article 5 of the Agreement
on Agriculture may be established by any method other than a
comparison of the c.i.f. price of the shipment with the trigger
price.

Article 5, also found in Part III of the Agreement on Agriculture on
“Market Access”, lends contextual support to our interpretation of
Article 4.2. In our view, the existence of a market access exemption in
the form of a special safeguard provision under Article 5 implies that
Article 4.2 should not be interpreted in a way that permits
Members to maintain measures that a Member would not be permitted to
maintain but for Article 5, and, much less, measures that are
even more trade-distorting than special safeguards. In particular, if
Article 4.2 were interpreted in a way that allowed Members to maintain
measures that operate in a way similar to a special safeguard within the
meaning of Article 5 — but without respecting the conditions set out
in that provision for invoking such measures — it would be difficult
to see how proper meaning and effect could be given to those conditions
set forth in Article 5.

… Article 4.2 expressly identifies two exceptions to the obligations
that it imposes on all WTO Members, namely, Article 5 and Annex 5 to the
Agreement on Agriculture. …The provisions of Article 5
establish the conditions in which a Member may have recourse to such a
special safeguard, set out rules on the form and duration of such
safeguard measures, and establish certain transparency requirements that
attach to their use. One circumstance in which a qualifying Member may
be authorized to adopt a special safeguard is when the price of imports
of a relevant agricultural product falls below a specified trigger
price. However, pursuant to Article 5, a special safeguard can be
imposed only on those agricultural products for which measures within
the meaning of footnote 1 were converted into ordinary customs duties
and for which a Member has reserved in its Schedule of Concessions a
right to resort to these safeguards. …

The existence of an exemption from the market access requirements in
the form of a special safeguard under Article 5 suggests that this
provision (in addition to Annex 5) was the narrowly circumscribed
vehicle to be used by those Members who reserved their rights to do so
in order to derogate from the requirements of Article 4.2. We note that
paragraph 9 of Article 5 provides that Article 5 is to remain in force
for the duration of the process of reform. Negotiations for the process
of reform are envisaged in Article 20 of the Agreement on Agriculture
and form part of the Doha Development Agenda. The establishment of a
special safeguard mechanism for developing country Members forms part of
the Doha Work Programme on agriculture. We, however, are charged with
reviewing the Panel’s interpretation of an existing obligation. We
recall, in this regard, that Article 4.2 must be interpreted in a way
that does not deprive Article 5 of proper meaning and effect.

… Article 6.3 deals with domestic support. It establishes only a quantitative
limitation on the amount of domestic support that a WTO Member can
provide in a given year. The quantitative limitation in Article 6.3
applies generally to all domestic support measures that are included in
a WTO Member’s AMS. …

Article 6.3 does not authorize subsidies that are contingent on the
use of domestic over imported goods. It only provides that a WTO Member
shall be considered to be in compliance with its domestic support reduction
commitments if its Current Total AMS does not exceed that Member’s
annual or final bound commitment level specified in its Schedule. It
does not say that compliance with Article 6.3 of the Agreement on
Agriculture insulates the subsidy from the prohibition in Article
3.1(b). …

… we find that paragraph 7 of Annex 3 and Article 6.3 of the Agreement
on Agriculture do not deal specifically with the same matter as
Article 3.1(b) of the SCM Agreement, that is, subsidies
contingent upon the use of domestic over imported goods.

It is clear from the plain wording of Article 8 that Members are
prohibited from providing export subsidies otherwise than in conformity
with the Agreement on Agriculture and the commitments as
specified in their Schedules. Thus, compliance with both is obligatory.
As compliance with the provisions of the Agreement on Agriculture is
obligatory, it is clear that the commitments specified in a Member’s
Schedule must be in conformity with the provisions of the Agreement. …

… we find no provision under the Agreement on Agriculture that
authorizes Members to depart, in their Schedules, from their obligations
under that Agreement. Indeed, as we have noted, Article 8 requires that,
in providing export subsidies, Members must comply with the provisions
of both the Agreement on Agriculture and the export subsidy
commitments specified in their Schedules. This is possible only if the
commitments in the Schedules are in conformity with the provisions of
the Agreement on Agriculture. Thus, we see no basis for the
European Communities’ assertion that it could depart from the
obligations under the Agreement on Agriculture through the
claimed commitment provided in Footnote 1.

The chapeau of Article 9.1 provides: “The following export
subsidies are subject to reduction commitments”. Hence, Article 9.1
sets forth a list of practices that, by definition, involve export
subsidies. In other words, a measure falling within Article 9.1 is
deemed to be an export subsidy within the meaning of Article 1(e) of the
Agreement on Agriculture. We observe that Article 9.1(c) requires
no independent enquiry into the existence of a “benefit”.

The chapeau of Article 9.1 says that the subsidies listed in that
Article “are subject to reduction commitments under this Agreement”.
The export subsidies given to ACP/India equivalent sugar, which
admittedly fall within the ambit of Article 9.1(a), are therefore
subject to reduction commitments. Furthermore, as noted by the Panel,
the provisions of Article 9.2(b)(iv) apply to Members that take
advantage of the flexibility provisions of Article 9.2(b). Article
9.2(b)(iv) specifies the reduction levels to be achieved at the
conclusion of the implementation period with respect to both budgetary
outlays and quantities. The provisions of Article 9.2(b)(iv) lend
contextual support to the view that export subsidies listed in Article
9.1 are subject to reduction commitments. We further note that Article
9.2(a)(i) and (ii) also make it clear that both budgetary outlay and
quantity commitments specified in a Member’s Schedule for each year of
the implementation period are “reduction” commitments. It follows
that the export subsidies provided to ACP/India equivalent sugar are
subject to reduction commitments in terms of Article 9.1 of the Agreement
on Agriculture.

A.1.15 Article 9.1(a) — “direct subsidies, including payments-in-kind”
back to top

In our view, the term “payments-in-kind” describes one of the forms
in which “direct subsidies” may be granted. Thus, Article 9.1(a)
applies to “direct subsidies”, including “direct subsidies”
granted in the form of “payments-in-kind”. We believe that, in its
ordinary meaning, the word “payments”, in the term “payments-in-kind”,
denotes a transfer of economic resources, in a form other than money,
from the grantor of the payment to the recipient. However, the fact that
a “payment-in-kind” has been made provides no indication as to the
economic value of the transfer effected, either from the
perspective of the grantor of the payment or from that of the recipient.
A “payment-in-kind” may be made in exchange for full or partial
consideration or it may be made gratuitously. Correspondingly, a “subsidy”
involves a transfer of economic resources from the grantor to the
recipient for less than full consideration. As we said in our Report in Canada
— Aircraft, a “subsidy”, within the meaning of Article 1.1 of
the SCM Agreement, arises where the grantor makes a “financial
contribution” which confers a “benefit” on the recipient, as
compared with what would have been otherwise available to the recipient
in the marketplace. Where the recipient gives full consideration in
return for a “payment-in-kind” there can be no “subsidy”, for
the recipient is paying market-rates for what it receives. It follows,
in our view, that the mere fact that a “payment-in-kind” has been
made does not, by itself, imply that a “subsidy”, “direct”
or otherwise, has been granted.

… According to Black’s Law Dictionary, “government”
means, inter alia, “[t]he regulation, restraint, supervision,
or control which is exercised upon the individual members of an
organized jural society by those invested with authority”
(emphasis added). This is similar to meanings given in other
dictionaries. The essence of “government” is, therefore, that it
enjoys the effective power to “regulate”, “control” or “supervise”
individuals, or otherwise “restrain” their conduct, through the
exercise of lawful authority. This meaning is derived, in part, from the
functions performed by a government and, in part, from the
government having the powers and authority to perform
those functions. A “government agency” is, in our view, an entity
which exercises powers vested in it by a “government” for the
purpose of performing functions of a “governmental” character, that
is, to “regulate”, “restrain”, “supervise” or “control”
the conduct of private citizens. As with any agency relationship, a “government
agency” may enjoy a degree of discretion in the exercise of its
functions.

A.1.16A Article 9.1(a)
— “contingent on export performance” back to top

In sum, we agree with the Panel’s view that Step 2 payments are
export-contingent and, therefore, an export subsidy for purposes of
Article 9 of the Agreement on Agriculture and Article 3.1(a) of
the SCM Agreement. The statute and regulations pursuant to which
Step 2 payments are granted, on their face, condition payments to
exporters on exportation. In order to claim payment, an exporter must
show proof of exportation. If an exporter does not provide proof of
exportation, the exporter will not receive a payment. This is sufficient
to establish that Step 2 payments to exporters of United States upland
cotton are “conditional upon export performance” or “dependent for
their existence on export performance”. That domestic users may also
be eligible to receive payments under different conditions does not
eliminate the fact that an exporter will receive payment only upon proof
of exportation.

We have found that the word “payments”, in the term “payments-in-kind”
in Article 9.1(a), denotes a transfer of economic resources. We believe
that the same holds true for the word “payments” in Article 9.1(c).
The question which we now address is whether, under Article 9.1(c), the
economic resources that are transferred by way of a “payment” must
be in the form of money, or whether the resources transferred may take
other forms. As the Panel observed, the dictionary meaning of the word
“payment” is not limited to payments made in monetary form. In
support of this, the Panel cited the Oxford English Dictionary,
which defines “payment” as “the remuneration of a person with
money or its equivalent” (emphasis added). Similarly, the Shorter
Oxford English Dictionary describes a “payment” as a “sum of
money (or other thing) paid” (emphasis added). Thus, according
to these meanings, a “payment” could be made in a form, other than
money, that confers value, such as by way of goods or services. A “payment”
which does not take the form of money is commonly referred to as a “payment
in kind”.

We agree with the Panel that the ordinary meaning of the word “payments”
in Article 9.1(c) is consistent with the dictionary meaning of the word.
Under Article 9.1(c), “payments” are “financed by virtue of
governmental action” and they may or may not involve “a charge on
the public account”. Neither the word “financed” nor the term “a
charge” suggests that the word “payments” should be interpreted to
apply solely to money payments. A payment made in the form of goods or
services is also “financed” in the same way as a money payment, and,
likewise, “a charge on the public account” may arise as a result of
a payment, or a legally binding commitment to make payment by way of
goods or services, or as a result of revenue forgone.

Article 9.1(c) does not qualify the term “payments” by reference
to the entity making, or the entity receiving the payment. This may be
contrasted with, for instance, Articles 9.1(a) and 9.1(b) of the Agreement
on Agriculture, which specifically refer to the entities making and
also, in the case of Article 9.1(a), to the entity receiving the alleged
export subsidy. Moreover, Article 9.1(c), on its face, does not qualify
the meaning of the term “payments”, other than by requiring that the
alleged “payments” be “on the export of an agricultural product”
and “financed by virtue of governmental action”.

As we noted above, the European Communities submits, first, that a
“payment” within the meaning of Article 9.1(c) requires, by
definition, the presence of two distinct legal entities. We agree with
the European Communities that a “payment”, within the meaning of
Article 9.1(c), certainly occurs when one entity transfers economic
resources to another entity. …

This, however, does not imply that the term “payment” necessarily
requires, in each and every case, the presence of two distinct entities.
In other words, contrary to the European Communities’ argument, we do
not see, a priori, any reason why “payments”, within the
meaning of Article 9.1(c), cannot include, in the particular
circumstances of this dispute, transfers of resources within one
economic entity. The “payment” in this case is not merely a “purely
notional” one but, rather, reflects a very concrete transfer of
economic resources to C sugar production. In the specific dispute before
us, C sugar is being sold on the world market by European Communities’
sugar producers/exporters at a price that does not “even remotely”
cover its average total cost of production. In the light of the enormous
difference between the price of C sugar and its average total cost of
production, we do not see how the “payment” identified by the Panel
was “purely notional”.

The European Communities’ approach is, in our view, too
formalistic. To illustrate, one could envisage a scenario under which
the producers of C sugar are legally distinct from the producers of A
and B sugar. In this situation, the European Communities’ approach
could recognize that a “payment” under Article 9.1(c) could exist
because there would be a transfer of economic resources between
different parties. If, however, these same producers of A, B, and C
sugar were integrated producers and organized as single legal entities,
a payment under Article 9.1(c) would not exist, because the transfer
would be merely “internal”. We do not believe that the applicability
of Article 9.1(c) should depend on how an economic entity is legally
organized.

…The European Communities argues that, because the alleged “cross-subsidization”
involves no “transfer of resources” to the sugar producers, it
confers no benefit upon these producers and, therefore, cannot be
considered to provide a subsidy. The European Communities disagrees with
the Panel’s finding that Article 9.1(c) does not require the
demonstration of a benefit for a measure to constitute a “payment”
within the meaning of that provision.

The chapeau of Article 9.1 provides: “The following export
subsidies are subject to reduction commitments”. Hence, Article 9.1
sets forth a list of practices that, by definition, involve export
subsidies. In other words, a measure falling within Article 9.1 is
deemed to be an export subsidy within the meaning of Article 1(e) of the
Agreement on Agriculture. We observe that Article 9.1(c) requires
no independent enquiry into the existence of a “benefit”.

Although we did not have to examine whether the benchmarks used by
the panel in the original proceedings were appropriate, our findings in
those proceedings provide guidance in identifying when “payments”
are made under Article 9.1(c).We recall that we upheld the original
panel’s finding that “the provision of discounted milk to
processors or exporters under Special Classes 5(d) and 5(e) involves ‘payments’
within the meaning of Article 9.1(c) of the Agreement on Agriculture”
(emphasis added). In reaching this conclusion, we noted that, where milk
is sold at “reduced rates (that is, at below market-rates),
‘payments’ are, in effect, made to the recipient of the portion of
the price that is not charged” (emphasis added). We noted that the
producer of the milk “forgoes” the uncharged portion of the price.
In short, we indicated that there are “payments” under Article
9.1(c) when the price charged by the producer of the milk is less than
the milk’s proper value to the producer.

Thus, the determination of whether “payments” are involved
requires a comparison between the price actually charged by the provider
of the goods or services — the prices of CEM in this case — and some
objective standard or benchmark which reflects the proper value of the
goods or services to their provider — the milk producer in this case.
We do not accept Canada’s argument that as the producer negotiates
freely the price with the processor, and CEM prices are, therefore,
market-determined, it is not necessary to compare these prices with an
objective standard.

Article 9.1(c) of the Agreement on Agriculture does not
expressly identify any standard for determining when a measure involves
“payments” in the form of payments-in-kind. The absence of an
express standard in Article 9.1(c) may be contrasted with several other
provisions involving export subsidies which do provide an express
standard. Thus, for instance, even within Article 9.1 itself,
sub-paragraphs (b) and (e) expressly provide that the domestic market
constitutes the appropriate basis for comparison.

We believe that it is significant that Article 9.1(c) of the Agreement
on Agriculture does not expressly identify a standard or benchmark
for determining whether a measure involves “payments”. It is clear
that the notion of “payments” encompasses a diverse range of
practices involving a transfer of resources, either monetary or in-kind.
Moreover, the “payments” may take place in many different factual
and regulatory settings. Accordingly, we believe that it is necessary to
scrutinize carefully the facts and circumstances of a disputed measure,
including the regulatory framework surrounding that measure, to
determine the appropriate basis for comparison in assessing whether the
measure involves “payments” under Article 9.1(c).

… There can be little doubt, however, that the administered price is
a price that is favourable to the domestic producers. Consequently, sale
of CEM by the producer at less than the administered domestic price does
not, necessarily, imply that the producer has forgone a portion of the
proper value of the milk to it. In the situation where the producer,
rather than the government, chooses to produce and sell CEM in the
marketplace at a price it freely negotiates, we do not believe it is
appropriate to use, as a basis for comparison, a domestic price that is
fixed by the government.

… If a producer wishes to sell milk for export processing, it is
obvious that the price of the milk to the processor must be competitive
with world market prices. If it is not, the processor will not buy the
milk, as it will not be able to produce a final product that is
competitive in export markets. Accordingly, the range of world market
prices determines the price which the producer can charge for milk
destined for export markets. World market prices do, therefore, provide
one possible measure of the value of the milk to the producer.

However, world market prices do not provide a valid basis for
determining whether there are “payments”, under Article 9.1(c) of
the Agreement on Agriculture, for it remains possible that the
reason CEM can be sold at prices competitive with world market prices is
precisely because sales of CEM involve subsidies that make it
competitive. Thus, a comparison between CEM prices and world market
prices gives no indication on the crucial question, namely, whether
Canadian export production has been given an advantage. Furthermore, if
the basis for comparison were world market prices, it would be possible
for WTO Members to subsidize domestic inputs for export processing,
while taking care to maintain the price of these inputs to the
processors at a level which equalled or marginally exceeded world market
prices. …

Although the proceeds from sales at domestic or world market prices
represent two possible measures of the value of milk to the producer, we
do not see these as the only possible measures of this value. For any
economic operator, the production of goods or services involves an
investment of economic resources. In the case of a milk producer,
production requires an investment in fixed assets, such as land, cattle
and milking facilities, and an outlay to meet variable costs, such as
labour, animal feed and health-care, power and administration. These
fixed and variable costs are the total amount which the producer must
spend in order to produce the milk and the total amount it must recoup,
in the long-term, to avoid making losses. To the extent that the
producer charges prices that do not recoup the total cost of production,
over time, it sustains a loss which must be financed from some other
source, possibly “by virtue of governmental action”.

In our view, reliance upon the total cost of production, in this
dispute, as a basis for determining whether there are “payments”
within the meaning of Article 9.1(c), is in harmony with the domestic
support and export subsidies disciplines of the Agreement on
Agriculture. Under Article 3 of the Agreement on Agriculture,
WTO Members are entitled to provide “domestic support” to
agricultural producers within the limits of their domestic support
commitments. The same Article establishes separate disciplines on export
subsidies which prohibit WTO Members from providing such subsidies
in excess of their export subsidy commitments.

It is possible that the economic effects of WTO-consistent domestic
support in favour of producers may “spill over” to provide certain
benefits to export production, especially as many agricultural products
result from a single line of production that does not distinguish
whether the production is destined for consumption in the domestic or
export market.

We believe that it would erode the distinction between the domestic
support and export subsidies disciplines of the Agreement on
Agriculture if WTO-consistent domestic support measures were
automatically characterized as export subsidies because they produced
spill-over economic benefits for export production. Indeed, this is
another reason why we do not agree with the Panel that sales of CEM at
any price below the administered domestic price for milk can be regarded
as “payments” under Article 9.1(c) of the Agreement on
Agriculture. Such a basis for comparison would tend to collapse the
distinction between these two different disciplines.

However, we consider that the distinction between the domestic
support and export subsidies disciplines in the Agreement on
Agriculture would also be eroded if a WTO Member were entitled to
use domestic support, without limit, to provide support for exports of
agricultural products. Broadly stated, domestic support provisions of
that Agreement, coupled with high levels of tariff protection, allow
extensive support to producers, as compared with the limitations imposed
through the export subsidies disciplines. Consequently, if domestic
support could be used, without limit, to provide support for exports, it
would undermine the benefits intended to accrue through a WTO Member’s
export subsidy commitments.

In our view, by relying upon the total cost of production in this
dispute, to determine whether there are “payments”, the integrity of
the two disciplines is best respected. The existence of “payments”
is determined by reference to a standard that focuses upon the
motivations of the independent economic operator who is making the
alleged “payments” — here the producer — and not upon any
government intervention in the marketplace. More importantly, using this
basis for comparison, the potential for WTO Members to export their
agricultural production is preserved, provided that any export-destined
sales by a producer at below the total cost of production are not
financed by virtue of governmental action. The export subsidy
disciplines of the Agreement on Agriculture will also be
maintained without erosion.

Our approach is supported by the standards used in items (j) and (k)
of the Illustrative List of the SCM Agreement. Item (j) is
concerned with export subsidies that arise through the provision by the
government of a variety of export credit guarantee and insurance
programmes. Under item (j), the provision of such services by the
government involves export subsidies when the premium rates charged do
not “cover the long-term operating costs and losses of the
programmes” (emphasis added). Thus, the measure of value under item
(j) is the overall cost to the government, as the service provider, of
providing the service. Likewise, in item (k), where the government
provides export credits, the measure of the value of the service
provided by the government is the amount “which [governments] actually
have to pay for the funds so employed (or would have to pay if they
borrowed on international capital markets …)”. Again, the measure of
value is by reference to the cost to the government, as the service
provider, of providing the service. Therefore, items (j) and (k) give
contextual support and rationale, for using the cost of
production as a standard for determining whether there are “payments”
under Article 9.1(c) of the Agreement on Agriculture in these
proceedings.

A producer’s cost of production may be measured in, at least, two
ways. First, for any given unit of production, for instance a hectolitre
of milk, there is an average total cost of production, which is the
total cost of production divided by the total number of units produced,
regardless of whether the production is destined for the domestic or
export markets. The total cost of production includes all fixed
and variable costs incurred in the production of all the units in
question. Second, there is also the marginal cost of production which
includes only the additional costs incurred by the producer in producing
an extra unit of production. Generally, the marginal cost of production
does not include any amount for the fixed costs of production. Although
a producer may very well decide to sell goods or services if the sales
price covers its marginal costs, the producer will make losses on such
sales unless all of the remaining costs associated with making these
sales, essentially the fixed costs, are financed through some other
source, such as through highly profitable sales of the product in
another market.

In the ordinary course of business, an economic operator chooses to
invest, produce and sell, not only to recover the total cost of
production, but also in the hope of making profits.

Accordingly, in the circumstances of these proceedings, where the
alleged payment is made by an independent economic operator and where
the domestic price is administered, we believe that the average total
cost of production represents the appropriate standard for determining
whether sales of CEM involve “payments” under Article 9.1(c) of the Agreement
on Agriculture. The average total cost of production would be
determined by dividing the fixed and variable costs of producing all milk,
whether destined for domestic or export markets, by the total number of
units of milk produced for both these markets.

… The export subsidy described in Article 9.1(c) comprises of
several elements, the first of which is that there must be “payments”.
But the “payments” will be an export subsidy only when they are
financed by virtue of governmental action. Thus, on the basis of the
standard of average total cost of production, there will be an export
subsidy only if the below-cost portion of an export sale is “financed
by virtue of governmental action”.

…In this respect, we are also mindful of the fact that, in the
ordinary course of business, an economic operator makes a decision to
produce and sell a product expecting to recover the total cost of
production and to make profits. Clearly, sales below total cost of
production cannot be sustained in the long term, unless they are
financed from some other sources. This is especially true when the
volume of the loss-making sales is substantial. …

Finally, we believe that the Panel did not err when it applied, in
ascertaining the existence of “payments” under Article 9.1(c), the
average total cost of production benchmark, which the Appellate Body
held was appropriate in the circumstances in Canada — Dairy
(Article 21.5 — New Zealand and US). Given the huge volumes of C
sugar exports and the price at which C sugar is being sold on the world
market, we concur with the Panel that such production quantities cannot
be deemed “incidental”. We note in this context that C sugar
represents between 11 and 21 per cent of the European Communities’
total quota production, and that between 1997 and 2002, exports ranged
between 1.3 and 3.3 million tonnes. As we have already noted, C sugar is
being sold on the world market for prices that do not “even remotely”
cover its average total cost of production.

The European Communities argues that, even if the Appellate Body were
to conclude that “cross-subsidization” may constitute a “payment”
within the meaning of Article 9.1(c), the Panel’s finding is “seriously
flawed”. The European Communities contends that, in ascertaining the
existence of “payments”, the Panel erred in using as a benchmark the
average total cost of production of all sugar. According to the
European Communities, the Panel should have used, instead, the average
total cost of producing C sugar, because the beet used in the
production of C sugar is purchased at prices that are “generally lower”
than the minimum prices for A and B beet.

The average total cost of production of sugar includes the cost of
all economic resources used in sugar production, which means the cost of
all economic resources invested in beet production, transport, and
processing of beet into sugar, which is only notionally classified into
A, B, and C sugar. It is for this reason that the Panel emphasized that
“[s]ugar is sugar whether or not produced under an EC created
designation of A, B or C sugar.” The Panel further emphasized that “A,
B or C sugar are part of the same line of production” and that “[t]here
is no independent production of C sugar.” It follows, in our view,
that the average total cost of production of C sugar must be the same as
the average total cost of production of all sugar. The European
Communities’ argument is flawed because the price of C beet does not
determine the average total cost of production of C sugar. For these
reasons, we do not agree with the European Communities that the Panel’s
use of the average total cost of production of all sugar as a
benchmark for ascertaining the existence of payments was flawed in the
particular circumstances of this case.

We believe that the standard for determining the existence of “payments”,
under Article 9.1(c), should reflect the fact that the obligation at
issue is an international obligation imposed on Canada. The question is
not whether one or more individual milk producers, efficient or not, are
selling CEM at a price above or below their individual costs of
production. The issue is whether Canada, on a national basis, has
respected its WTO obligations and, in particular, its commitment levels.
It, therefore, seems to us that the benchmark should be a single,
industry-wide cost of production figure, rather than an indefinite
number of cost of production figures for each individual producer. The
industry-wide figure enables cost of production data for producers, as a
whole, to be aggregated into a single, national standard that can be
used to assess Canada’s compliance with its international obligations.

By contrast, if the benchmark were to operate at the level of each
individual producer, there would be a proliferation of standards,
requiring individual-level inquiry and application of Article 9.1(c), as
if the obligations under the Agreement on Agriculture involved
rights and obligations of individual producers, rather than WTO Members.

… the purpose of the COP standard is precisely to determine whether
supplies of CEM involve payments-in-kind that are made in a form other
than money. If the COP standard were confined solely to cash costs, as
Canada argues, this would overlook the possibility of “payments”
being made in the form of non-cash resources invested in the production
of milk. Thus, the COP standard must cover all of the economic resources
invested in the production of milk and which may be transferred,
irrespective of whether the resources involve an actual cash cost.

We are satisfied that any labour or management services provided by
the farmer’s family to the dairy enterprise are relevant economic
resources invested in the production of milk and must be included in the
COP standard. For the dairy farmer, and his or her family, the
investment of services in the dairy enterprise has an economic cost, as
those services cannot be put to an alternative remunerative use.… Moreover, we believe that remuneration of family labour and management
services is not part of the profits of the dairy farm. Rather, profits
are the proceeds remaining after all costs, including such salary costs,
have been accounted for.

The same is also true of any equity the owner invests in the dairy
enterprise. The allocation of such capital is, clearly, an investment of
economic resources and carries an economic opportunity cost to the owner
because the capital cannot simultaneously be invested elsewhere. Again,
the profits of the dairy enterprise are the proceeds after all costs,
including the cost of equity, have been accounted for.

Although it is clear that the COP standard includes all economic
costs, even if they are non-cash costs, we acknowledge that a specific
value cannot be as readily ascribed to non-cash costs as it can to cash
costs. …

In some situations, it may be appropriate for a panel to value
non-monetary costs using a methodology set forth in a Member’s
Generally Accepted Accounting Principles (“GAAP”). In that respect,
we observe that Canada did not contest the amounts the Canadian Dairy
Commission (the “CDC”) ascribed to depreciation using the rules in
Canadian GAAP. However, although GAAP provide an objective valuation
methodology for some non-monetary costs, they may not address all such
costs. If GAAP rules do not provide an appropriate basis for valuing a
particular cost, a panel should attempt to determine a value for
relevant non-monetary costs using an objective methodology that is
reasonable in the circumstances. Clearly, a panel must base itself on
the evidence before it, applying the applicable rules on burden of
proof.

We recall that the COP standard represents the producer’s
investment of economic resources in milk and, hence, in these
proceedings, the proper value of the milk to the producer. In our view,
costs incurred by the producer in selling milk are as much a part of the
economic resources the producer invests in the milk as are farm-based
production costs. Indeed, the costs incurred to make sales are a vital
part of the process by which the producer earns revenues through
producing milk. …

In addition, we can see no reason to exclude the cost of quota from
the COP standard. On the contrary, to the extent that the acquisition or
retention of quota involves economic costs for the dairy producer, these
costs should be reflected in the COP standard. In that respect, we are
not persuaded by Canada that the cost of quota should be excluded from
the COP standard because it relates solely to the domestic market. In
the first Article 21.5 proceedings, we held that the COP standard must
be determined for “all milk, whether destined for domestic or export
markets”. Thus, in principle, the costs of quota form part of the COP
standard. …

Although the phrase “financed by virtue of governmental action”
must be understood as a whole, it is useful to consider separately the
meaning of the different parts of this phrase. Taking the words “governmental
action” first, we observe that the text of Article 9.1(c) does not
place any qualifications on the types of “governmental action” which
may be relevant under Article 9.1(c). In the original proceedings, we
stated that “[t]he essence of ‘government’ is …that it enjoys
the effective power to ‘regulate’, ‘control’ or ‘supervise’
individuals, or otherwise ‘restrain’ their conduct, through the
exercise of lawful authority.” In our opinion the word “action”
embraces the full range of these activities, including governmental
action regulating the supply and price of milk in the domestic market.

Mere governmental action is not, however, sufficient for a finding
that there is an export subsidy under Article 9.1(c). The words “by
virtue of” indicate that there must be a demonstrable link between the
governmental action at issue and the financing of the
payments, whereby the payments are, in some way, financed as a result
of, or as a consequence of, the governmental action. In our view, the
link between governmental action and the financing of payments will be
more difficult to establish, as an evidentiary matter, when the payment
is in the form of a payment-in-kind rather than in monetary form, and
all the more so when the payment-in-kind is made, not by the government,
but by an independent economic operator. In any event, it will not be
sufficient simply to demonstrate that a payment occurs as a consequence
of governmental action because the word “financed”, in Article
9.1(c), must also be given meaning.

… Article 9.1(c) of the Agreement on Agriculture describes an
unusual form of subsidy in that “payments” can be made by private
parties, and need not be made by government. Moreover, “payments”
need not be funded from government resources, provided they are “financed
by virtue of governmental action”. Article 9.1(c), therefore,
contemplates that “payments” may be made and funded by private
parties, without the type of governmental involvement ordinarily
associated with a subsidy. Furthermore, the notion of payments
encompasses a diverse range of practices involving monetary transfers,
or transfers-in-kind. We, therefore, determined that, in identifying
whether “payments” are made, it is necessary to consider the
particular features of the alleged “payments”, by whom they are
made, and in what circumstances. Thus, we found that the standard for
determining the existence of “payments” under Article 9.1(c) must be
identified after careful scrutiny of the factual and regulatory setting
of the measure.

… under Article 9.1(c) of the Agreement on Agriculture, it is
not solely the conduct of WTO Members that is relevant. We have noted
that Article 9.1(c) describes an unusual form of export subsidy in that
“payments” can be made and funded by private parties, and not just
by government. The conduct of private parties, therefore, may play an
important role in applying Article 9.1(c). Yet, irrespective of the role
of private parties under Article 9.1(c), the obligations imposed in
relation to Article 9.1(c) remain obligations imposed on Canada. It is
Canada, and not private parties, which is responsible for ensuring that
it respects its export subsidy commitments under the covered agreements.
Thus, under the Agreement on Agriculture, any “export subsidies”
provided through private party action in Canada are deemed to be
provided by Canada, and count towards Canada’s export subsidy
commitment levels.

As regards “governmental action”, we held in the first Article
21.5 proceedings that “the text of Article 9.1(c) does not place any
qualifications on the types of ‘governmental action’ which may be
relevant under Article 9.1(c)”. Instead, the provision gives but one
example of governmental action that is “included” in Article 9.1(c) —
however, this example is merely illustrative. Accordingly, we stated
that Article 9.1(c) “embraces the full range” of activities by which
governments “‘regulate’, ‘control’ or ‘supervise’
individuals”. In particular, we said that governmental action “regulating
the supply and price of milk in the domestic market” might be relevant
“action” under Article 9.1(c). Moreover, the governmental action may
be a single act or omission, or a series of acts or omissions.

We observe that Article 9.1(c) does not require that payments be
financed by virtue of government “mandate”, or other “direction”.
Although the word “action” certainly covers situations where
government mandates or directs that payments be made, it also covers
other situations where no such compulsion is involved.113

In assessing whether the Panel erred in finding that the “payments”
made under Special Classes 5(d) and 5(e) are “financed by virtue of
governmental action”, it is appropriate to look to the “governmental”
involvement as a whole and not just to the role of the provincial milk
marketing boards. The functioning of the system depends on a complex
regulatory web involving the CDC and the CMSMC, acting together with the
provincial milk marketing boards. It is, therefore, the “action” of
all these bodies together which must be examined.

While the “cost of selling milk at a reduced price for export is
not borne by the government”, “governmental action” is, in our
view, indispensable to the transfer of resources that takes place as a
result of the operation of Special Classes 5(d) and 5(e). The factors
relied upon by the Panel, which we have summarized above, demonstrate
that at every stage in the supply of milk under Special Classes
5(d) and 5(e), from the determination of the volume and the
authorization of the purchase of milk for processing for export, to the
calculation of the price of the milk to the processors and the return to
the producers, “governmental action” is not simply involved; it is,
in fact, indispensable to enable the supply of milk to processors for
export, and hence the transfer of resources, to take place. In the
regulatory framework, “government agencies” stand so completely
between the producers of the milk and the processors or the exporters
that we have no doubt that the transfer of resources takes place “by
virtue of governmental action”.

The words “by virtue of”, therefore, express the relationship
between “governmental action” and the “financing” of payments
for the purpose of Article 9.1(c). The essence of that relationship is
the “nexus” or “link” between “action” and “financing”.

Thus, although Article 9.1(c) extends, in principle, to any “governmental
action”, not every governmental action will have the requisite nexus
to the financing of payments. …

These general remarks illustrate well that “[i]t is extremely
difficult … to define in the abstract the precise character of
the required link between the governmental action and the financing of
the payments, particularly where payments-in-kind are at issue.” In
each case, the alleged link must be examined taking account of the
particular character of the governmental action at issue and its
relationship to the payments made.

… We have agreed with the Panel that a significant percentage of
producers are likely to finance sales of CEM at below the costs of
production as a result of participation in the domestic market. Canadian
“governmental action” controls virtually every aspect of domestic
milk supply and management. In particular, government agencies fix the
price of domestic milk that renders it highly remunerative to producers.
Government action also controls the supply of domestic milk through
quota, thereby protecting the administered price. The imposition by
government of financial penalties on processors that divert CEM into the
domestic market is another element of governmental control over the
supply of milk. Further, the degree of government control over the
domestic market is emphasized by the fact that government pools,
allocates, and distributes revenues to producers from all domestic
sales. Finally, governmental action also protects the domestic market
from import competition through tariffs.

In our view, the effect of these different governmental actions is to
secure a highly remunerative price for sales of domestic milk by
producers. In turn, it is due to this price that a significant
proportion of producers cover their fixed costs in the domestic market
and, as a result, have the resources profitably to sell export milk at
prices that are below the costs of production.

Accordingly, we agree with the Panel that “governmental action”
in the domestic market plays a critical part in the “financing” of
payments made by a significant percentage of producers on the sale of
CEM. As such, we agree with the Panel that payments made through the
supply of CEM at below the COP standard are financed by virtue of this
governmental action. …

We do not agree with Canada that the circumstances indicate that the
Canadian government has merely created a regulatory framework whereby it
has enabled producers to sell CEM at prices that are below the costs of
production. Certainly, producers decide for themselves whether and when
to sell CEM. However, governmental action in the domestic market goes
further than simply creating a regulatory environment in which producers
choose to make export payments using their own resources. Rather, as we
have said, Canadian governmental action is instrumental in providing a
significant percentage of producers with the resources that enable them
to sell CEM at below the costs of production.

With respect to the words “by virtue of”, the Appellate Body has
previously held that there must be a “nexus” or “demonstrable link”
between the governmental action at issue and the financing of payments.
The Appellate Body clarified that not every governmental action will
have the requisite “nexus” to the financing of payments. For
instance, the Appellate Body held that the “demonstrable link”
between “governmental action” and the “financing” of payments
would not exist in a scenario in which “governmental action … establish[es]
a regulatory framework merely enabling a third person freely to
make and finance ‘payments’ ”. In this situation, the link between
the governmental action and the financing of payments would be “too
tenuous”, such that the “payments” could not be regarded as “financed
by virtue of governmental action” within the meaning of Article
9.1(c). Rather, according to the Appellate Body, there must be a “tighter
nexus” between the mechanism or process by which the payments are
financed (even if by a third person) and governmental action. In this
respect, the Appellate Body clarified that, although governmental action
is essential, Article 9.1(c) contemplates that “payments may be
financed by virtue of governmental action even though significant
aspects of the financing might not involve government”. Thus, even if
government does not fund the payments itself, it must play a
sufficiently important part in the process by which a private party
funds “payments”, such that the requisite nexus exists between “governmental
action” and the “financing”. The alleged link must be examined on
a case-by-case basis, taking account of the particular character of the
governmental action at issue and its relationship to the payments made.

… in its finding that “payments” in the form of sales of C beet
below its total cost of production are “financed by virtue of
governmental action”, the Panel relied on a number of aspects of the
EC sugar regime. The Panel considered, inter alia, that: the EC
sugar regime regulates prices of A and B beet and establishes a
framework for the contractual relationships between beet growers and
sugar producers with a view to ensuring a stable and adequate income for
beet growers; C beet is invariably produced together with A and B beet
in one single line of production; a significant percentage of beet
growers are likely to finance sales of C beet below the total cost of
production as a result of participation in the domestic market by making
“highly remunerative” sales of A and B beet; the European
Communities “controls virtually every aspect of domestic beet and
sugar supply and management”, including through financial penalties
imposed on sugar producers that divert C sugar into the domestic market;
the European Communities’ Sugar Management Committee “overviews,
supervises and protects the [European Communities’] domestic sugar
through, inter alia, supply management”; the growing of C beet
is not “incidental”, but rather an “integral” part of the
governmental regulation of the sugar market; and C sugar producers “have
incentives to produce C sugar so as to maintain their share of the A
and B quotas”, while C beet growers “have an incentive to supply as
much as is requested by C sugar producers with a view to receiving the
high prices for A and B beet and their allocated amount of … C
beet”.

We agree with the Panel that, in the circumstances of the present
case, all of these aspects of the EC sugar regime have a direct bearing
on whether below-cost sales of C beet are financed by virtue of
governmental action. As a result, we are unable to agree with the
European Communities’ first argument on appeal, namely, that the Panel
applied a test under which an Article 9.1(c) subsidy was deemed to exist
“simply because [governmental] action ‘enabled’ the beet growers
to finance and make payments”. Rather, we believe that the Panel
relied on aspects of the EC sugar regime that go far beyond merely “enabling”
or “permitting” beet growers to make payments to sugar producers. …

We now turn to the European Communities’ argument that governmental
action under the EC sugar regime is “less pervasive” than
governmental action in Canada — Dairy (Article 21.5 — New Zealand
and the US II). We do not consider it inherently useful to compare
the governmental action at issue and the governmental action in the
context of a different dispute. The issue before us is not a comparison
between two governmental regimes, but rather, whether “payments”
under the EC sugar regime are “financed by virtue of governmental
action”. As the Appellate Body stated in Canada — Dairy (Article
21.5 — New Zealand and the US), “the existence of … a
demonstrable link [between governmental action and the financing of
payments] must be identified on a case-by-case basis, taking
account of the particular governmental action at issue and its
effects on payments made by a third person”. …

The word “financed” might be given a rather specific meaning such
that it would be confined to the financing of “payments” in monetary
form or to the funding of “payments” from government resources.
However, we have already recalled that “payments”, under Article
9.1(c), include payments-in-kind, so the word “financed” needs to
cover both the financing of monetary payments and payments-in-kind. In
addition, Article 9.1(c) explicitly excludes a reading of the word “financed”
whereby payments must be funded from government resources, as the
provision states that payments can be financed by virtue of governmental
action “whether or not a charge on the public account is involved”.
Thus, under Article 9.1(c), it is not necessary that the economic
resources constituting the “payment” actually be paid by the
government or even that they be paid from government resources.
Accordingly, although the words “by virtue of” render governmental
action essential, Article 9.1(c) contemplates that payments may be
financed by virtue of governmental action even though significant
aspects of the financing might not involve government.

It is extremely difficult, however, to define in the abstract the
precise character of the required link between the governmental action
and the financing of the payments, particularly where payments-in-kind
are at issue. Governments are constantly engaged in regulation of
different kinds in pursuit of a variety of objectives. For instance, we
can envisage that governmental action might establish a regulatory
framework merely enabling a third person freely to make and finance “payments”.
In this situation, the link between the governmental action and the
financing of the payments is too tenuous for the “payments” to be
regarded as “financed by virtue of governmental action”
(emphasis added) within the meaning of Article 9.1(c). Rather, there
must be a tighter nexus between the mechanism or process by which the
payments are financed, even if by a third person, and
governmental action. In our opinion, the existence of such a
demonstrable link must be identified on a case-by-case basis, taking
account of the particular governmental action at issue and its effects
on payments made by a third person.

It is true that Canadian governmental action establishes a regulatory
regime whereby some milk producers can make additional profits only if
they choose to sell CEM. However, even though Canadian governmental
action prevents further domestic sales, we do not see how producers are
obliged or driven to produce additional milk for export sale. As we said
above, each producer is free to decide whether or not to produce
additional milk for sale as CEM. Furthermore, as we also said, the
majority of Canadian milk producers choose not to sell CEM. For these
reasons, we disagree with the Panel’s characterization of the measure
as “obliging producers, at least de facto, to sell
outside-quota milk for export”.

… The word [“financing”] refers generally to the mechanism or
process by which financial resources are provided to enable “payments”
to be made. The word could, therefore, be read to mean that government
itself must provide the resources for producers to make payments.
However, Article 9.1(c) expressly precludes such a reading, as it states
that “payments” need not involve “a charge on the public account”.
This is borne out by the fact that the text indicates that “financing”
need only be “by virtue of governmental action”, rather than “by
government” itself. Article 9.1(c), therefore, contemplates that “payments
may be financed by virtue of governmental action even though significant
aspects of the financing might not involve government”. Indeed, as we
have said, payments may be made, and funded, by private parties.

The word “financing” must, nonetheless, be given meaning.
Accordingly, even if government does not fund the payments itself, it
must play a sufficiently important part in the process by which a
private party funds “payments”, such that the requisite nexus exists
between “governmental action” and “financing”.

Where fungible goods, such as milk, are produced using a single line
of production, but sold in two different markets, the fixed costs of
production are, in principle, shared between sales revenues from both
markets. However, in the event that one of the two markets offers much
higher revenues, a disproportionately large part, possibly even all, of
the shared fixed costs may be borne by sales made in the more
remunerative market.

Where sales in the more remunerative market bear more than their
relative proportion of shared fixed costs, sales in the other market do
not need to cover their relative proportion of the shared fixed costs in
order to be profitable. Rather, these sales can be made profitably below
the average total cost of production. If the more remunerative sales
cover all fixed costs, sales in the other market can be made profitably
at any price above marginal cost. In these situations, the higher
revenue sales effectively “finance” a part of the lower
revenue sales by funding the portion of the shared fixed costs
attributable to the lower priced products.

Addressing the word “financed”, the Appellate Body held that this
word generally refers to the “mechanism” or “process” by which
financial resources are provided, such that payments are made. Article
9.1(c), by stating “whether or not a charge on the public account is
involved”, expressly provides that the government itself need not
provide the resources for producers to make payments. Instead,
payments may be made and funded by private parties.

Canada also objects that this reasoning brings “cross-subsidization”
under Article 9.1(c) of the Agreement on Agriculture. We have
explained that the text of Article 9.1(c) applies to any “governmental
action” which “finances” export “payments”. The text does not
exclude from the scope of the provision any particular governmental
action, such as regulation of domestic markets, to the extent that this
action may become an instrument for granting export subsidies. Nor does
the text exclude any particular form of financing, such as “cross-subsidization”.
Moreover, the text focuses on the consequences of governmental action (“by
virtue of which”) and not the intent of government. Thus, the
provision applies to governmental action that finances export payments,
even if this result is not intended. As stated in our Report in the
first Article 21.5 proceedings, this reading of Article 9.1(c) serves to
preserve the legal “distinction between the domestic support and
export subsidies disciplines of the Agreement on Agriculture”.
Subsidies may be granted in both the domestic and export markets,
provided that the disciplines imposed by the Agreement on the levels of
subsidization are respected. If governmental action in support of the
domestic market could be applied to subsidize export sales, without
respecting the commitments Members made to limit the level of export
subsidies, the value of these commitments would be undermined. Article
9.1(c) addresses this possibility by bringing, in some circumstances,
governmental action in the domestic market within the scope of the “export
subsidies” disciplines of Article 3.3.

As we noted above, the European Communities submits, first, that a
“payment” within the meaning of Article 9.1(c) requires, by
definition, the presence of two distinct legal entities. We agree with
the European Communities that a “payment”, within the meaning of
Article 9.1(c), certainly occurs when one entity transfers economic
resources to another entity. …

This, however, does not imply that the term “payment” necessarily
requires, in each and every case, the presence of two distinct entities.
In other words, contrary to the European Communities’ argument, we do
not see, a priori, any reason why “payments”, within the
meaning of Article 9.1(c), cannot include, in the particular
circumstances of this dispute, transfers of resources within one
economic entity. The “payment” in this case is not merely a “purely
notional” one but, rather, reflects a very concrete transfer of
economic resources to C sugar production. In the specific dispute before
us, C sugar is being sold on the world market by European Communities’
sugar producers/exporters at a price that does not “even remotely”
cover its average total cost of production. In the light of the enormous
difference between the price of C sugar and its average total cost of
production, we do not see how the “payment” identified by the Panel
was “purely notional”.

The European Communities’ approach is, in our view, too
formalistic. To illustrate, one could envisage a scenario under which
the producers of C sugar are legally distinct from the producers of A
and B sugar. In this situation, the European Communities’ approach
could recognize that a “payment” under Article 9.1(c) could exist
because there would be a transfer of economic resources between
different parties. If, however, these same producers of A, B, and C
sugar were integrated producers and organized as single legal entities,
a payment under Article 9.1(c) would not exist, because the transfer
would be merely “internal”. We do not believe that the applicability
of Article 9.1(c) should depend on how an economic entity is legally
organized.

The European Communities argues that the Panel misinterpreted the
requirement that a payment be “on the export” of an agricultural
product, as contained in Article 9.1(c). …

… the Panel based its findings on the following reasoning:

C sugar
[can] only be sold for export. If not reclassified, C sugar “may not
be disposed of in the Community’s internal market and must be exported
without further processing”. Because of that legal requirement,
advantages, payments or subsidies to C sugar, that must be exported, are
subsidies “on the export” of that product.

We agree with the Panel. Under Article 13(1) of EC Regulation
1260/2001, C sugar “must be exported”. It follows that payments in
the form of “cross-subsidization” are, by definition, “payments”
“on the export”.

The text of Article 9.1(d) lists “handling, upgrading and other
processing costs, and the costs of international transport and freight”
as examples of “costs of marketing”. The text also states that “export
promotion and advisory services” are covered by Article 9.1(d),
provided that they are not “widely available”. These are not
examples of just any “cost of doing business” that “effectively
reduce[s] the cost of marketing” products. Rather, they are specific
types of costs that are incurred as part of and during the
process of selling a product. They differ from general business costs,
such as administrative overhead and debt financing costs, which are not
specific to the process of putting a product on the market, and which
are, therefore, related to the marketing of exports only in the broadest
sense.

… Income tax liability under the FSC measure arises only when goods
are actually sold for export, that is, when they have been the
subject of successful marketing. Such liability arises because goods
have, in fact, been sold, and not as part of the process of
marketing them. Furthermore, at the time goods are sold, the costs
associated with putting them on the market — costs such as handling,
promotion and distribution costs — have already been incurred and the
amount of these costs is not altered by the income tax, the amount of
which is calculated by reference to the sale price of the goods. In our
view, if income tax liability arising from export sales can be viewed as
among the “costs of marketing exports”, then so too can virtually
any other cost incurred by a business engaged in exporting. …

A.1.29A Article 9.2
— Budgetary outlay and quantity commitment
levels back to top

We find contextual support for the above interpretation in Article
9.2(b)(iv) of the Agreement on Agriculture, which provides:

(iv) the Member’s budgetary outlays for export subsidies and the
quantities benefiting from such subsidies, at the conclusion of the
implementation period, are no greater than 64 per cent and 79 per cent
of the 1986-1990 base period levels, respectively. For developing
country Members these percentages shall be 76 and 86 per cent,
respectively.

This provision prescribes the export subsidy commitment levels to be
reached at the conclusion of the implementation period (and to be
maintained thereafter), and those commitment levels are expressed in
terms of both budgetary outlays and quantities. We do not see how a
Member could comply with Article 9.2(b)(iv), or for that matter Article
9.2(a), without having specified its export subsidy commitments in terms
of both budgetary outlays and quantities. We also consider it
significant that both Article 9.2(b)(iii) and Article 9.2(b)(iv) use the
expression “budgetary outlays for export subsidies and the quantities benefiting
from such subsidies” (emphasis added). This shows the drafters’
recognition of the need to address the budgetary outlays and quantities
together.

We find it significant that paragraph 2 of Article 10 is included in
an Article that is titled the “Prevention of Circumvention of Export
Subsidy Commitments”. As Brazil correctly points out, each paragraph
in Article 10 pursues this aim. Article 10.1 provides that WTO Members
shall not apply export subsidies not listed in Article 9.1 of the Agreement
on Agriculture “in a manner which results in, or which threatens
to lead to, circumvention of export subsidy commitments; nor shall
non-commercial transactions be used to circumvent such commitments”.
Article 10.3 pursues the aim of preventing circumvention of export
subsidy commitments by providing special rules on the reversal of burden
of proof where a Member exports an agricultural product in quantities
that exceed its reduction commitment level; in such a situation a WTO
Member is treated as if it has granted WTO inconsistent export
subsidies for the excess quantities, unless the Member presents adequate
evidence to “establish” the contrary. Article 10.4 provides
disciplines to prevent WTO Members from circumventing their export
subsidy commitments through food aid transactions. Similarly, Article
10.2 must be interpreted in a manner that is consistent with the aim of
preventing circumvention of export subsidy commitments that pervades
Article 10. Otherwise, it would not have been included in that
provision.

The word “commitments” generally connotes “engagements” or
“obligations”. Thus, the term “export subsidy commitments”
refers to commitments or obligations relating to export subsidies
assumed by Members under provisions of the Agreement on Agriculture,
in particular, under Articles 3, 8 and 9 of that Agreement.

A.1.31 Article 10.1
— “export subsidies” not listed in Article
9.1 back to top

It is clear from the opening clause of Article 10.1 that this
provision is residual in character to Article 9.1 of the Agreement on
Agriculture. If a measure is an export subsidy listed in Article
9.1, it cannot simultaneously be an export subsidy under Article 10.1.
In light of the facts available to us, we have found that we are unable
to determine whether the measure at issue is an export subsidy listed in
Article 9.1(c). However, it remains possible that the measure is such
an export subsidy. Clearly, in that event, the opening clause of Article
10.1 means that the measure could not also be an export subsidy under
Article 10.1. In these circumstances, where we are unable to determine
the legal character of the measure under Article 9.1 of the Agreement
on Agriculture, we are similarly unable to rule upon the legal
character of the measure under Article 10.1 of that Agreement.

… The verb “circumvent” means, inter alia, “find a way
round, evade …”. Article 10.1 is designed to prevent Members from
circumventing or “evading” their “export subsidy commitments”.
This may arise in many different ways. …

In determining whether the FSC measure in this case is “applied in
a manner which … threatens to lead to circumvention of export
subsidy commitments”, it is important to consider the structure and
other characteristics of that measure. The FSC measure creates, in
itself, a legal entitlement for recipients to receive export
subsidies, not listed in Article 9.1, with respect to agricultural
products, both scheduled and unscheduled. As we understand it, that
legal entitlement arises in the recipient when it complies with the
statutory requirements and, at that point, the government of the United
States must grant the FSC tax exemptions. There is, therefore, no
discretionary element in the provision by the government of the FSC
export subsidies. If the statutory eligibility requirements are met,
then an FSC is entitled by law to the statutorily established tax
exemption. Furthermore, there is no limitation on the amount of exempt
foreign trade income that may be earned by an FSC. Therefore, the legal
entitlement that the FSC measure establishes is unqualified as to the amount
of export subsidies that may be claimed by FSCs. There is, in other
words, no mechanism in the measure for stemming, or otherwise
controlling, the flow of FSC subsidies that may be claimed with respect
to any agricultural products. In this respect, the FSC measure is
unlimited.

With respect to unscheduled agricultural products, Members are
prohibited under Article 3.3 from providing any export
subsidies as listed in Article 9.1. Article 10.1 prevents the
application of export subsidies which “results in, or which threatens
to lead to, circumvention” of that prohibition. Members
would certainly have “found a way round”, a way to “evade”, this
prohibition if they could transfer, through tax exemptions, the very
same economic resources that they are prohibited from providing in other
forms under Articles 3.3 and 9.1. …

… Given that the nature of the “export subsidy commitment”
differs as between scheduled and unscheduled products, we believe that
what constitutes “circumvention” of those commitments, under Article
10.1, may also differ.

… In our view, Members would have found “a way round”, a way to
“evade”, their commitments under Articles 3.3 and 9.1, if they could
transfer, through tax exemptions, the very same economic resources that
they were, at that time, prohibited from providing through other
methods under the first clause of Article 3.3 and under 9.1.

… Export credit guarantees are subject to the export subsidy
disciplines in the Agreement on Agriculture only to the extent
that such measures include an export subsidy component. If no such
export subsidy component exists, then the export credit guarantees are
not subject to the Agreement’s export subsidy disciplines. Moreover,
even when export credit guarantees contain an export subsidy component,
such an export credit guarantee would not be inconsistent with Article
10.1 of the Agreement on Agriculture unless the complaining party
demonstrates that it is “applied in a manner which results in, or
which threatens to lead to, circumvention of export subsidy commitments”.
Thus, under the Agreement on Agriculture, the complaining party
must first demonstrate that an export credit guarantee programme
constitutes an export subsidy. If it succeeds, it must then demonstrate
that such export credit guarantees are applied in a manner that results
in, or threatens to lead to, circumvention of the responding party’s
export subsidy commitments within the meaning of Article 10.1 of the Agreement
on Agriculture.

We find nothing wrong in the Panel having relied on an admission by
the United States relating to rice to conclude that the United States
had failed to rebut Brazil’s initial allegation of circumvention. This
did not excuse the Panel, however, from specifically analysing Brazil’s
claim in respect of the other products. Consequently, we find no basis
to support the Panel’s finding that “[i]t has not been established,
however, that such actual circumvention has resulted in respect of the
twelve other United States scheduled commodities”.

We must determine next whether there are sufficient uncontested facts
in the record to permit us to complete the analysis with respect to the
other commodities. In our view, there are not. First, the parties
disagree about the time period covered by Brazil’s claim. The United
States asserts that Brazil’s claim was limited to the period July 2001
to June 2002, while Brazil contends that its claim was not limited to
that period. Second, as we noted previously, different time periods are
used for the sets of data that have to be compared. The data regarding
United States exports under the export credit guarantee programmes are
maintained on a fiscal year basis, which extends from 1 October to 30
September of the following year. The United States’ export subsidy
commitments are registered based on a year that extends from 1 July to
30 June of the following year. Both Brazil and the United States have
sought to reconcile the data. In each case, Brazil and the United States
assert that the data support their position. Given the differences
between the participants in respect of the data that we would have to
examine to determine whether the United States applied export credit
guarantees in a manner that results in circumvention of its export
subsidy commitments for pig meat and poultry meat, we do not believe
there are sufficient undisputed facts in the record to enable us to
complete the analysis.

The Appellate Body has explained that “under Article 10.1, it is
not necessary to demonstrate actual ‘circumvention’ of ‘export
subsidy commitments’ ”. It suffices that “export subsidies” are
“applied in a manner which … threatens to lead to
circumvention of export subsidy commitments”. We note that the
ordinary meaning of the term “threaten” includes “[c]onstitute a
threat to”, “be likely to injure” or “be a source of harm or
danger”. Article 10.1 is concerned not with injury, but rather with
“circumvention”. Accordingly, based on its ordinary meaning, the
phrase “threaten … to lead to … circumvention” would
imply that the export subsidies are applied in a manner that is “likely
to” lead to circumvention of a WTO Member’s export subsidy
commitments. Furthermore, we observe that the ordinary meaning of the
term “threaten” refers to a likelihood of something
happening; the ordinary meaning of “threaten” does not connote a
sense of certainty.

The concept of “threat” has been discussed by the Appellate Body
within the context of the Agreement on Safeguards and the Anti-Dumping
Agreement. It has explained that “threat” refers to something
that “has not yet occurred, but remains a future event whose
actual materialization cannot, in fact, be assured with certainty”. In
US — Line Pipe, the Appellate Body stated that there is a
continuum that ascends from a “threat of serious injury” up to the
“serious injury” itself. We emphasize that the Appellate Body’s
discussion of the concept of “threat” in previous appeals related to
the interpretation of other covered agreements that contain obligations
relating to injury that differ from those relating to circumvention of
export subsidy reduction commitments contained in Article 10.1 of the Agreement
on Agriculture. Our interpretation of “threat” in Article 10.1
of the Agreement on Agriculture is consistent with the Appellate
Body’s interpretation of the term “threat” in these other
contexts.

The Panel explained that, in its view, “threat” of circumvention
under Article 10.1 requires that there be “an unconditional legal
entitlement”. We see no basis for this requirement in Article 10.1.
The Panel also stated that “[i]n order to pose a ‘threat’ within
the meaning of Article 10.1 of the Agreement on Agriculture, [it
did] not believe that it is sufficient that an export credit guarantee
programme might possibly, or theoretically, be used in a manner which
threatens to lead to circumvention of export subsidy commitments”. In
both of these statements, the Panel seems to conflate the phrase “threaten
to lead to … circumvention” with certainty that the
circumvention will happen. We find it difficult, moreover, to reconcile
the Panel’s interpretation with the ordinary meaning of the term “threaten”,
which, as we indicated earlier, connotes that something is “likely”
to happen. We also find it difficult to reconcile these statements of
the Panel with its own view that it did “not believe that the ‘mandatory/discretionary’
distinction is the sole legally determinative one for our examination of
whether or not ‘threat’ of circumvention of export subsidy
commitments within the meaning of Article 10.1 of the Agreement on
Agriculture has been proven to the required standard”.

Nor are we prepared to accept Brazil’s suggestion that the concept
of “threat” in Article 10.1 should be read in a manner that requires
WTO Members to take “anticipatory or precautionary action”. The
obligation not to apply export subsidies in a manner that “threatens
to lead to” circumvention of their export subsidy commitments does not
extend that far. There is no basis in Article 10.1 for requiring WTO
Members to take affirmative, precautionary steps to ensure that
circumvention of their export subsidy reduction commitments does not
occur.

In concluding as it did, the Panel appears to have relied on the
Appellate Body Report in US — FSC for guidance. In our view,
however, the Panel misapplies that analysis. We recall that, in US —
FSC, the Appellate Body underscored the importance of
considering “the structure and other characteristics of [the] measure”
when examining whether the specific measure at issue is “applied in a
manner which …threatens to lead to circumvention of export
subsidy commitments”. The Appellate Body then went on to note that the
specific measure at issue in that dispute created “a legal
entitlement for recipients to receive export subsidies, not listed
in Article 9.1, with respect to agricultural products, both scheduled
and unscheduled”. This meant that there was “no discretionary
element in the provision by the government of the FSC export subsidies”.
Furthermore, the Appellate Body noted that the “legal entitlement that
the FSC measure establishes is unqualified as to the amount of
export subsidies that may be claimed”. This meant that the measure was
“unlimited” because there was “no mechanism in the measure for
stemming, or otherwise controlling the flow of … subsidies that
may be claimed with respect to any agricultural products”.

A proper reading of the Appellate Body’s statement in US
— FSC,
however, reveals that it did not intend to provide an exhaustive
interpretation of threat of circumvention under Article 10.1 of the Agreement
on Agriculture. In noting that the measure at issue in that dispute
created a “legal entitlement” and had no “discretionary element”,
the Appellate Body was merely describing characteristics of the measure
at issue in that case that it found relevant for its analysis of “threat”.
In other words, the Appellate Body did not foreclose, in US — FSC,
the possibility that a measure that does not create a “legal
entitlement” or that has a “discretionary element” could be found
to “threaten … to lead to circumvention” under Article 10.1
of the Agreement on Agriculture.

We therefore modify the Panel’s interpretation … of the
phrase “threatens to lead to … circumvention” in Article
10.1 of the Agreement on Agriculture to the extent that the Panel’s
interpretation requires “an unconditional legal entitlement” to
receive the relevant export subsidies as a condition for a finding of
threat of circumvention.

We are not persuaded that the arguments put forward by Brazil
establish that the United States’ export credit guarantee programmes
are applied in a manner that threatens to lead to circumvention of the
United States’ export subsidy commitments in respect of scheduled
products other than rice and unscheduled products not supported under
the programmes. In our view, the fact alone that exports of certain
products are eligible for export credit guarantees is not sufficient to
establish a threat of circumvention. This is particularly the case where
there is no evidence in the record that exports of such products have
been “supported” by export credit guarantees in the past. As we
stated earlier, Article 10.1 of the Agreement on Agriculture does
not require WTO Members to take affirmative, precautionary steps to
ensure that circumvention of their export subsidy reduction commitments
never happens. Nor is it sufficient for Brazil to have alleged that the
United States has provided export credit guarantees to exports of other
unscheduled products or to exports of scheduled products in excess
of its export subsidy reduction commitments. Therefore, we agree with
the Panel that Brazil has not established that the United States applies
its export credit guarantee programmes to scheduled agricultural
products other than rice and other unscheduled agricultural products
(not “supported” under the programmes) “in a manner …which
threatens to lead to … circumvention” of the United States’
export subsidy commitments.

We believe the Panel was within its discretion in declining to
examine whether scheduled products other than rice and unscheduled
products supported by the programmes are applied in a manner that “threatens
to lead to” circumvention. The Panel had already found that the United
States acted inconsistently with Article 10.1 of the Agreement on
Agriculture because it applied its export credit guarantee programme
in a manner that “results in” (actual) circumvention of its export
subsidy commitments for these products. We do not see why the Panel had
to examine also whether the United States acted inconsistently with the same
provision in respect of the same products, but on the basis
of there being a threat of circumvention, rather than actual circumvention.

… International food aid is covered by the second clause of Article
10.1 to the extent that it is a “non-commercial transaction”.
Article 10.4 provides specific disciplines that may be relied on to
determine whether international food aid is being “used to circumvent”
a WTO Member’s export subsidy commitments. … WTO Members are free to
grant as much food aid as they wish, provided that they do so
consistently with Articles 10.1 and 10.4. Thus, Article 10.4 does not
support the United States’ reading of Article 10.2.

As we have concluded that the CEM scheme involves export subsidies
under Article 9.1(c) of the Agreement on Agriculture, those
subsidies cannot, by definition, simultaneously be export subsidies
under Article 10.1. … In these circumstances, both the Panel’s
reasoning and its finding under Article 10.1 of the Agreement on
Agriculture are moot and of no legal effect. …

Although Article 10.2 commits WTO Members to work toward the
development of internationally agreed disciplines on export credit
guarantees, export credits and insurance programmes, it is in Article
10.1 that we find the disciplines that currently apply to export
subsidies not listed in Article 9.1. A plain reading of Article 10.1
indicates that the only export subsidies that are excluded from its
scope are those “listed in paragraph 1 of Article 9”. … Thus, to
the extent that an export credit guarantee meets the definition of an
“export subsidy” under the Agreement on Agriculture, it would
be covered by Article 10.1. Article 1(e) of the Agreement on
Agriculture defines “export subsidies” as “subsidies
contingent upon export performance, including the export
subsidies listed in Article 9 of this Agreement” (emphasis added). The
use of the word “including” suggests that the term “export
subsidies” should be interpreted broadly and that the list of export
subsidies in Article 9 is not exhaustive. Even though an export credit
guarantee may not necessarily include a subsidy component, there is
nothing inherent about export credit guarantees that precludes such
measures from falling within the definition of a subsidy. An export
credit guarantee that meets the definition of an export subsidy would be
covered by Article 10.1 of the Agreement on Agriculture because
it is not an export subsidy listed in Article 9.1 of that Agreement.

Article 10.2 refers expressly to export credit guarantee programmes,
along with export credits and insurance programmes. Under Article
10.2,WTO Members have taken on two distinct commitments in respect of
these three types of measures: (i) to work toward the development of
internationally agreed disciplines to govern their provision; and (ii)
after agreement on such disciplines, to provide them only in conformity
therewith. The text includes no temporal indication with respect to the
first commitment. There is no deadline for beginning or ending the
negotiations. The second commitment does have a temporal connotation, in
the sense that it is triggered only “after agreement on such
disciplines”. This means that “after” international disciplines
have been agreed upon, Members shall provide export credit guarantees,
export credits and insurance programmes only in conformity with those
agreed disciplines. There is no dispute between the parties that, to
date, no disciplines have been agreed internationally pursuant to
Article 10.2.

Article 10.2 does not, however, expressly define the disciplines that
currently apply to export credits, export credit guarantees and
insurance programmes under the Agreement on Agriculture. …

We agree with the Panel’s view that Article 10.2 does not expressly
exclude export credit guarantees from the export subsidy disciplines in
Article 10.1 of the Agreement on Agriculture. As the Panel
observes, were such an exemption intended, it could have been easily
achieved by, for example, inserting the words “[n]otwithstanding the
provisions of Article 10.1”, or other similar language at the
beginning of Article 10.2. Article 10.2 does not include express
language suggesting that it is intended as an exception, nor does it
expressly state that the application of any export subsidy disciplines
to export credits or export credit guarantees is “deferred”, as the
United States suggests. Given that the drafters were aware that
subsidized export credit guarantees, export credits and insurance
programmes could fall within the export subsidy disciplines in the Agreement
on Agriculture and the SCM Agreement, it would be expected
that an exception would have been clearly provided had this been the
drafters’ intention.

Although Article 10.2 commits WTO Members to work toward the
development of internationally agreed disciplines on export credit
guarantees, export credits and insurance programmes, it is in Article
10.1 that we find the disciplines that currently apply to export
subsidies not listed in Article 9.1. A plain reading of Article 10.1
indicates that the only export subsidies that are excluded from its
scope are those “listed in paragraph 1 of Article 9”. … Thus, to
the extent that an export credit guarantee meets the definition of an
“export subsidy” under the Agreement on Agriculture, it would
be covered by Article 10.1. Article 1(e) of the Agreement on
Agriculture defines “export subsidies” as “subsidies
contingent upon export performance, including the export
subsidies listed in Article 9 of this Agreement” (emphasis added). The
use of the word “including” suggests that the term “export
subsidies” should be interpreted broadly and that the list of export
subsidies in Article 9 is not exhaustive. Even though an export credit
guarantee may not necessarily include a subsidy component, there is
nothing inherent about export credit guarantees that precludes such
measures from falling within the definition of a subsidy. An export
credit guarantee that meets the definition of an export subsidy would be
covered by Article 10.1 of the Agreement on Agriculture because
it is not an export subsidy listed in Article 9.1 of that Agreement.

… Similarly, Article 10.2 must be interpreted in a manner that is
consistent with the aim of preventing circumvention of export subsidy
commitments that pervades Article 10. Otherwise, it would not have been
included in that provision.

The United States submits that Article 10.2 contributes to the
prevention of circumvention because it commits WTO Members to work
toward the development of internationally agreed disciplines and to
provide export credit guarantees, export credits and insurance
programmes only in conformity with these disciplines once an agreement
has been reached. We are not persuaded by this argument. The necessary
implication of the United States’ interpretation of Article 10.2 is
that, until WTO Members reach an agreement on international disciplines,
export credit guarantees, export credits and insurance programmes are
subject to no disciplines at all. In other words, under the
United States’ interpretation, WTO Members are free to “circumvent”
their export subsidy commitments through the use of export credit
guarantees, export credits and insurance programmes until
internationally agreed disciplines are developed, whenever that may be.
We find it difficult to believe that the negotiators would not have been
aware of and did not seek to address the potential that subsidized
export credit guarantees, export credits and insurance programmes could
be used to circumvent a WTO Member’s export subsidy reduction
commitments. Indeed, such an interpretation would undermine the
objective of preventing circumvention of export subsidy commitments,
which is central to the Agreement on Agriculture.

… Article 10.4 provides specific disciplines that may be relied on
to determine whether international food aid is being “used to
circumvent” a WTO Member’s export subsidy commitments. There is no
contradiction in the Panel’s approach to Article 10.2 and its approach
to Article 10.4. The measures in Article 10.2 and the transactions in
Article 10.4 are both covered within the scope of Article 10.1. …

We agree with the Panel that the meaning of Article 10.2 is clear
from the provision’s text, in its context and in the light of the
object and purpose of the Agreement on Agriculture, consistent
with Article 31 of the Vienna Convention. The Panel did not think
it necessary to resort to negotiating history for purposes of its
interpretation of Article 10.2. Even if the negotiating history were
relevant for our inquiry, we do not find that it supports the United
States’ position. This is because it does not indicate that the
negotiators did not intend to discipline export credit guarantees,
export credits and insurance programmes at all. To the contrary,
it shows that negotiators were aware of the need to impose disciplines
on export credit guarantees, given their potential as a mechanism for
subsidization and for circumvention of the export subsidy commitments
under Article 9. Although the negotiating history reveals that the
negotiators struggled with this issue, it does not indicate that the
disagreement among them related to whether export credit guarantees,
export credits and insurance programmes were to be disciplined at all.
In our view, the negotiating history suggests that the disagreement
between the negotiators related to which kinds of specific disciplines
were to apply to such measures. The fact that negotiators felt that
internationally agreed disciplines were necessary for these three
measures also suggests that the disciplines that currently exist in the Agreement
on Agriculture must apply pending new disciplines because,
otherwise, it would mean that subsidized export credit guarantees,
export credits, and insurance programmes could currently be extended
without any limit or consequence.

We do not agree with the United States’ submission in this regard.
There could have been several reasons why Members chose not to include
export credit guarantees, export credits and insurance programmes under
Article 9.1 of the Agreement on Agriculture. One reason, for
instance, may be that they considered that their export credit
guarantee, export credit or insurance programmes did not include a
subsidy component, so that there was no need to subject them to export
subsidy reduction commitments. There could have been other reasons.
Thus, the fact that export credit guarantees, export credits and
insurance programmes were not included in Article 9.1 does not support
the United States’ interpretation of Article 10.2. We also observe
that whether WTO Members with export credit guarantee programmes have
reported them in their export subsidy notifications is not determinative
for purposes of our inquiry into the meaning of Article 10.2. In any
event, the United States and Brazil disagree about whether such
programmes are subject to notification requirements.

Accordingly, we do not believe that Article 10.2 of the Agreement
on Agriculture exempts export credit guarantees, export credits and
insurance programmes from the export subsidy disciplines in the Agreement
on Agriculture. This does not mean that export credit guarantees,
export credits and insurance programmes will necessarily constitute
export subsidies for purposes of the Agreement on Agriculture.
Export credit guarantees are subject to the export subsidy disciplines
in the Agreement on Agriculture only to the extent that such
measures include an export subsidy component. If no such export subsidy
component exists, then the export credit guarantees are not subject to
the Agreement’s export subsidy disciplines. Moreover, even when export
credit guarantees contain an export subsidy component, such an export
credit guarantee would not be inconsistent with Article 10.1 of the Agreement
on Agriculture unless the complaining party demonstrates that it is
“applied in a manner which results in, or which threatens to lead to,
circumvention of export subsidy commitments”. Thus, under the Agreement
on Agriculture, the complaining party must first demonstrate that an
export credit guarantee programme constitutes an export subsidy. If it
succeeds, it must then demonstrate that such export credit guarantees
are applied in a manner that results in, or threatens to lead to,
circumvention of the responding party’s export subsidy commitments
within the meaning of Article 10.1 of the Agreement on Agriculture.

Before proceeding further, we refer to the order followed by the
Panel in its analysis of Brazil’s claims against the United States’
export credit guarantee programmes. We do not find that the Panel’s
order of analysis was wrong or that it constituted legal error. Nor has
the United States made such a claim on appeal. Nevertheless, we are
struck by the fact that the Panel addressed Article 10.2 only at the end
of its analysis, especially given that this provision constituted the
core of the United States’ defence that the disciplines of the Agreement
on Agriculture currently do not apply to export credit guarantees at
all.

A.1.34 Article 10.3
— Reversal of burden of proof.See also Burden
of Proof, Reversal (B.3.4)
back to top

As we have reversed the Panel’s findings regarding the standard for
determining the existence of “payments” and have, instead,
identified the appropriate standard for these proceedings, namely, the
average total cost of production, we now consider whether we can resolve
this aspect of the dispute by completing the analysis. The Panel found
that, in these proceedings, Article 10.3 of the Agreement on
Agriculture reverses the burden of proof so that Canada must
establish “that no export subsidy … has been granted”.
Although the burden of proof is on Canada, we must nonetheless complete
the analysis solely on the basis of factual findings made by the Panel
and uncontested facts in the Panel record.

… under the usual allocation of the burden of proof, a responding
Member’s measure will be treated as WTO-consistent, until
sufficient evidence is presented to prove the contrary. We will not
readily find that the usual rules on burden of proof do not apply, as
they reflect a “canon of evidence” accepted and applied in
international proceedings.

…

[Article 10.3] requires that a specific Member, in defined
circumstances, “establish that no export subsidy … has been
granted”. …The provision refers to a Member making a “claim”
that certain exports are “not [being] subsidized”. Although
the word “claim” usually refers to an assertion by a complaining
Member that a measure is WTO-inconsistent, in this provision the
word “claim” refers to an assertion by a responding Member that a
measure is WTO-consistent. The “claim” to which Article 10.3
refers is, therefore, a defensive argument made by the responding
Member.

Article 10.3 does not impose any substantive obligations regulating
the grant of export subsidies under the Agreement on Agriculture.
Rather, Article 10.3 provides a special rule for proof of export
subsidies that applies in certain disputes under Articles 3, 8, 9, and
10 of the Agreement on Agriculture.

In identifying the nature of the special rule, it is useful to
analyse the character of claims brought under these provisions. Pursuant
to Article 3 of the Agreement on Agriculture, a Member is entitled
to grant export subsidies within the limits of the reduction
commitment specified in its Schedule. Where a Member claims that another
Member has acted inconsistently with Article 3.3 by granting export
subsidies in excess of a quantity commitment level, there are two separate
parts to the claim. First, the responding Member must have exported an
agricultural product in quantities exceeding its quantity commitment
level. If the quantities exported do not reach the quantity commitment
level, there can be no violation of that commitment, under Article 3.3.
However, merely exporting a product in quantities that exceed the
quantity commitment level is not inconsistent with the commitment. The
commitment is an undertaking to limit the quantity of exports that may
be subsidized and not a commitment to restrict the volume or
quantity of exports as such. The second part of the claim is,
therefore, that the responding Member must have granted export subsidies
with respect to quantities exceeding the quantity commitment level.
There is, in other words, a quantitative aspect and an export
subsidization aspect to the claim.

Under the usual rules on burden of proof, the complaining Member
would bear the burden of proving both parts of the claim. However,
Article 10.3 of the Agreement on Agriculture partially alters the
usual rules. The provision cleaves the complaining Member’s claim in
two, allocating to different parties the burden of proof with respect to
the two parts of the claim we have described.

… The language of Article 10.3 is clearly intended to alter the
generally accepted rules on burden of proof. The verb “establish” is
synonymous with the verbs “demonstrate” and “prove”. Moreover,
the auxiliary verb “must” conveys that the responding Member has an
obligation — or legal burden — to “establish” or “prove”
that “no export subsidy … has been granted”.

… The significance of Article 10.3 is that, where a Member exports
an agricultural product in quantities that exceed its quantity
commitment level, that Member will be treated as if it has granted WTO-inconsistent
export subsidies, for the excess quantities, unless the Member
presents adequate evidence to “establish” the contrary. This
reversal of the usual rules obliges the responding Member to bear the
consequences of any doubts concerning the evidence of export
subsidization. Article 10.3 thus acts as an incentive to Members to
ensure that they are in a position to demonstrate compliance with their
quantity commitments under Article 3.3.

With respect to the export subsidization part of the claim, the
complaining Member, therefore, is relieved of its burden, under the
usual rules, to establish a prima facie case of export
subsidization of the excess quantity, provided that this Member has
established the quantitative part of the claim. …

… Article 10.3 pursues the aim of preventing circumvention of export
subsidy commitments by providing special rules on the reversal of burden
of proof where a Member exports an agricultural product in quantities
that exceed its reduction commitment level; in such a situation a WTO
Member is treated as if it has granted WTO-inconsistent export
subsidies for the excess quantities, unless the Member presents adequate
evidence to “establish” the contrary. …

We agree with the United States that Article 10.3 of the Agreement
on Agriculture does not apply to claims brought under the SCM
Agreement. However, the Panel did not make the error attributed to
it by the United States. The Panel made the statement relied on by the
United States in the context of its assessment of the United States’
export credit guarantee programme under the Agreement on Agriculture.
Although the Panel made use of the criteria set out in item (j) of the
Illustrative List of Export Subsidies annexed to the SCM Agreement (providing
these programmes at premium rates inadequate to cover long-term
operating costs and losses) it did so as contextual guidance for its
analysis under the Agreement on Agriculture, and both the United
States and Brazil appear to have agreed with the appropriateness of this
approach. Thus, the Panel’s reference to Article 10.3 did not relate
to its assessment of the United States’ export credit guarantee
programmes under the SCM Agreement.

We disagree with the Panel’s view that Article 10.3 applies to unscheduled
products. Under the Panel’s approach, the only thing a complainant
would have to do to meet its burden of proof when bringing a claim
against an unscheduled product is to demonstrate that the
respondent has exported that product. Once that has been established,
the respondent would have to demonstrate that it has not provided an
export subsidy. This seems to us an extreme result. In effect, it would
mean that any export of an unscheduled product is presumed to be
subsidized. In our view, the presumption of subsidization when exported
quantities exceed the reduction commitments makes sense in respect of a scheduled
product because, by including it in its schedule, a WTO Member is
reserving for itself the right to apply export subsidies to that
product, within the limits in its schedule. In the case of unscheduled
products, however, such a presumption appears inappropriate. Export
subsidies for both unscheduled agricultural products and industrial
products are completely prohibited under the Agreement on Agriculture
and under the SCM Agreement, respectively. The Panel’s
interpretation implies that the burden of proof with regard to the same
issue would apply differently, however, under each Agreement: it would
be on the respondent under the Agreement on Agriculture, while it
would be on the complainant under the SCM Agreement.

A.1.34A Article 10.3
— Relationship with Article 6.2 of the DSU back to top

… Article 6.2 of the DSU and Article 10.3 of the Agreement on
Agriculture address different matters and apply at different stages
of panel proceedings. A panel request, on its face, must comply with the
requirements of Article 6.2 of the DSU, whereas Article 10.3 of the Agreement
on Agriculture relates to a Member’s duty to adduce evidence to
substantiate its assertions during the course of the panel
proceedings. …

The United States submits that, under the Panel’s approach,
international food aid transactions would be subject to the “full
array of export subsidy disciplines” because they are not expressly
excluded from Article 10.1. …

We are unable to subscribe to the United States’ arguments because
we do not see Article 10.4 as excluding international food aid from the
scope of Article 10.1. International food aid is covered by the second
clause of Article 10.1 to the extent that it is a “non-commercial
transaction”. Article 10.4 provides specific disciplines that may be
relied on to determine whether international food aid is being “used
to circumvent” a WTO Member’s export subsidy commitments. There is
no contradiction in the Panel’s approach to Article 10.2 and its
approach to Article 10.4. The measures in Article 10.2 and the
transactions in Article 10.4 are both covered within the scope of
Article 10.1. As Brazil submits, “Article 10.4 provides an example of
specific disciplines that have been agreed upon for a particular type of
measure and that complement the general export subsidy rules” but,
like Article 10.2, it does not “establish any exceptions for the
measures that [it] covers”. WTO Members are free to grant as much food
aid as they wish, provided that they do so consistently with Articles
10.1 and 10.4. Thus, Article 10.4 does not support the United States’
reading of Article 10.2.

A.1.34C Article 13
— “due restraint” (peace clause).See
also Agreement on Agriculture, Relationship between the Agreement on Agriculture and the GATT 1994
(A.1.37) back to top

… domestic support that conforms fully to the provisions of Annex 2
— that is “green box” support, which is exempt from the domestic
support reduction obligations of the Agreement on Agriculture —
is also exempt, during the implementation period, from actions based on
Article XVI of GATT 1994 and the actionable subsidies provisions of Part
III of the SCM Agreement.

… production flexibility contract payments and direct payments are
not “decoupled income support” within the meaning of paragraph 6,
are not green box measures exempt from the reduction commitments by
virtue of Annex 2 of the Agreement on Agriculture, and are not,
therefore, sheltered from challenge by virtue of paragraph (a) of
Article 13 of the Agreement on Agriculture. Rather, these
measures are support covered by the chapeau to paragraph (b) of Article
13, and are to be taken into account in the analysis of that provision.

Subparagraph (ii) to Article 13(b) exempts non-green box domestic
support measures described in the chapeau from actions based on Article
XVI:1 of GATT 1994 and Articles 5 and 6 of the SCM Agreement.
This exemption is, however, subject to a proviso and is thus made
conditional upon a requirement that “such measures do not grant
support to a specific commodity in excess of that decided during the
1992 marketing year”. …

We turn to our analysis of the phrase “such measures … grant[ing]
support to a specific commodity” in Article 13(b)(ii). The Panel found
and the participants do not dispute that the relevant United States
measures grant “support”; similarly, the Panel found and the
participants agree that upland cotton is a “commodity” in the sense
of that provision.

The key element … is the significance of the qualifying word
“specific” in this phrase. The Panel described the ordinary meaning
of the term “specific” as “clearly or explicitly defined; precise;
exact; definite” and as “specially or peculiarly pertaining to a
particular thing or person, or a class of these; peculiar (to)”.
In our view, the term “specific” in the phrase “support to a
specific commodity” means the “commodity” must be clearly
identifiable. The use of the term “to” connecting “support” with
“a specific commodity” means that support must “specially pertain”
to a particular commodity in the sense of being conferred on that
commodity. In addition, the term “such measures … grant”
indicates that a discernible link must exist between “such measures”
and the particular commodity to which support is granted. Thus, it is
not sufficient that a commodity happens to benefit from support, or that
support ends up flowing to that commodity by mere coincidence. Rather,
the phrase “such measures” granting “support to a specific
commodity” implies a discernible link between the support-conferring
measure and the particular commodity to which support is granted.

Therefore, we agree with the Panel insofar as it found that the
ordinary meaning of the phrase “such measures … grant[ing]
support to a specific commodity” includes “non-green box
measures that clearly or explicitly define a commodity as one to which
they bestow or confer support”. This is because the Panel’s test
requires that a commodity be specified in the measure, and that the
support be conferred on that commodity. We believe, however, that the
terms of this definition do not exhaust the scope of measures that may
grant “support to a specific commodity”. We note in this regard that
the Panel looked, in applying its test, to factors such as eligibility
criteria and payment rates, as well as the relationship between payments
and current market prices of the commodity in question. In our view, the
Panel was correct to consider such matters, as the requisite link
between a measure granting support and a specific commodity may be
discerned not just from an explicit specification of the commodity in
the text of a measure, as the Panel’s test — on its face — seems
to imply, but also from an analysis of factors such as the
characteristics, structure or design of that measure.

… The proviso to Article 13(b)(ii) mentions only the term “such
measures” granting support; but the meaning of this term can be
clarified by reference to the chapeau of Article 13(b) because, as the
Panel noted, “[t]he chapeau of paragraph (b) and subparagraph (ii)
form part of a single sentence.” The chapeau identifies the categories
of support measures covered by that provision. These are:

… domestic support measures that conform fully to the provisions of
Article 6 of this Agreement including direct payments that conform to
the requirements of paragraph 5 thereof, as reflected in each Member’s
Schedule, as well as domestic support within de minimis levels and in
conformity with paragraph 2 of Article 6 …

Measures covered by Article 6 include both product-specific and
non-product-specific amber box support subject to reduction commitments.
In addition, measures covered by the chapeau also include
product-specific and non-product-specific support within de minimis levels.
They further include blue box support provided in accordance with
Article 6.5, as well as development box support, provided according to
the provisions of Article 6.2, for both of which the distinction between
product-specific and non-product specific support for purposes of the
AMS calculation has little practical relevance. Like the Panel, we
believe that the use of the term “such measures” in the proviso to
Article 13(b)(ii) indicates that all such measures identified in the
chapeau of Article 13(b) may qualify as granting “support to a
specific commodity” and are eligible to be included in the analysis.
By contrast, under the United States’ argument, domestic support
measures listed in the chapeau (with the exception of product-specific
amber box support) could not be “support to a specific commodity”
even if they confer support on a specific commodity and there is a
discernible link between the measure and that commodity.

The proviso to Article 13(b)(ii) requires an assessment of whether
the relevant United States non-green box domestic support measures
grant, during the implementation period, “support to a specific
commodity in excess of that decided during the 1992 marketing year”.

As we have explained above, the term “such measures … grant
support to a specific commodity” comprises two elements: first, a
non-green box measure actually confers support on the specific commodity
in question; and second, there is a discernible link between the measure
and the commodity, such that the measure is directed at supporting that
commodity. Such a discernible link may be evident where a measure
explicitly defines a specific commodity as one to which it bestows
support. Such a link might also be ascertained, as a matter of fact,
from the characteristics, structure or design of the measure under
examination. Conversely, support that does not actually flow to a
commodity or support that flows to a commodity by coincidence rather
than by the inherent design of the measure cannot be regarded as falling
within the ambit of the term “support to a specific commodity”.

We agree with the United States that payments made with respect to
historical upland cotton base acres to commodities other than upland
cotton or to producers who produced no commodities at all cannot be
deemed to be support granted to upland cotton for purposes of the
Article 13(b)(ii) comparison. The Article 13(b)(ii) assessment must be
limited to support conferred on planted upland cotton; support flowing
to other commodities that were planted, or support that was given where
no commodities were produced must of course be removed from the
assessment. We reject, therefore, the Panel’s calculation methodology to the
extent that it failed to limit the Article 13(b)(ii) calculation to
payments with respect to upland cotton base acres corresponding to
physical acres actually planted with upland cotton.

We observe, however, that the Panel acknowledged that a producer with upland cotton base
acres may plant any crop other than the excluded fruits, vegetables, and
wild rice, but it found that there was “a strongly positive
relationship between those recipients who hold upland cotton base acres
and those who continue to plant upland cotton, despite their entitlement
to plant other crops”. …

…The “cotton to cotton” methodology limits the Article
13(b)(ii) calculation to payments with respect to cotton base acres
corresponding to physical acres that were actually planted with upland
cotton.

We turn next to the United States’ contention that the mere fact
that a measure is based on historical production of upland cotton
is not a sufficient basis for a finding that the measure grants at
present “support to [the] specific commodity” upland cotton. We
agree that none of the base acre dependent programmes expressly ties
support to continued production of upland cotton. However, the absence
of an express reference in the legislation to continued production of
upland cotton does not mean that the payments do not grant support to
upland cotton. This is because a link between the four measures at issue
and the continued production of upland cotton is discernible from the
characteristics, structure and operation of those measures.

We underline that these Panel findings do not pertain to all payments
to current producers of upland cotton, but rather are limited to
payments to producers with respect to historic upland cotton base
acres. Indeed, we see little in the Panel’s finding or on the record
that would allow us to discern a link between the support-conferring
measures with respect to non-cotton historical base acres and current
production of upland cotton. We do not, therefore, accept the
methodology submitted by Brazil that included, in the Article 13(b)(ii)
calculation, payments with respect to both cotton and non-cotton base
acres flowing to current production of upland cotton. We believe that
only the “cotton to cotton” methodology, included by the Panel in
“Attachment to Section VII:D” to its Report as an “appropriate”
alternative calculation, sufficiently demonstrates a discernible link
between payments under base acre dependent measures (related to upland
cotton) and upland cotton.

Finally, we address the United States’ argument that the
calculation methodology under Article 13(b)(ii) must be based on only
those factors that the government of a Member can control, excluding,
for example, producer decisions regarding what crops to grow within the
scope of production flexibility allowed by the measures. In advancing
this contention, the United States relies upon the following statement
of the Panel:

[If] the proviso [to Article 13(b)(ii)] focused on where support was
spent due to reasons beyond the control of the government, such as
producer decisions on what to produce within a programme, it would
introduce a major element of unpredictability into Article 13, and
render it extremely difficult to ensure compliance.

The United States finds support for this view in the terms “grant”
and “decided” in Article 13(b)(ii), and claims that “the focus of
the Peace Clause comparison is on the support a Member decides”. We
note that the verbs “grant” and “decided” have distinct
meanings. We agree with the observation of the Panel that “ ‘[d]ecided’
refers to what the government determines, but ‘grant’ refers to what
its measures provide.” In Article 13(b)(ii), each of these words has
been chosen to govern one side of the comparison required by that
proviso. In the light of the distinct meanings of these words, and the
distinct roles they play in the context of Article 13(b)(ii), we reject
the idea that the word “grant”, which is applicable to
implementation period support, must be read to mean the same thing as
“decided”, which is applicable to the 1992 benchmark level of
support.

Moreover, we do not accept that unpredictability of producer
decisions under planting flexibility rules, per se, could modify
the specific requirements set out in the proviso to Article 13(b)(ii).
What is relevant for the comparison is the support that the measure
actually grants during the implementation period. Indeed, we agree with
Brazil that a certain degree of unpredictability in the volume of the
payments flowing to particular commodities is inherent in many of the
support measures disciplined by the Agreement on Agriculture,
including measures granting support to a specific commodity. The
existence of such unpredictability cannot be a ground to alter the basis
of comparison under the proviso to Article 13(b)(ii) from what is
actually “grant[ed]” in the implementation period to what is only
“decided”.

In addressing this issue, we — like the Panel —
note that Article
13(b)(ii) gives no specific guidance regarding how the “support”
that measures granted in the implementation period or that was decided
during the 1992 marketing year should be calculated. The Panel therefore
turned to the broader context of the Agreement on Agriculture and
chose to “apply the principles of AMS methodology” in accordance
with Annex 3 of the Agreement on Agriculture, with certain
modifications. We observe that, on appeal, neither of the participants,
nor indeed any of the third participants that addressed this issue,
suggested that the Panel erred in seeking guidance for its calculations
in the principles set out in Annex 3.

Against this background, we observe that paragraph 10 of Annex 3
provides that “non-exempt direct payments …dependent on a
price gap” may be measured using either price gap methodology or
budgetary outlay methodology. …

We note that the first sentence of paragraph 1 of Annex 2 lays down a
“fundamental requirement” for green box measures, such that they
must have “no, or at most minimal, trade-distorting effects or effects
on production”. The second sentence of paragraph 1 provides that, “[a]ccordingly”,
green box measures must conform to the basic criteria stated in that
sentence, “plus” the policy-specific criteria and conditions set out
in the remaining paragraphs of Annex 2, including those in paragraph 6.

As we have noted, the Panel found that the planting flexibility
limitations in this case “significantly constrain” production
decisions. However one reads the “fundamental requirement” in
paragraph 1 of Annex 2, given the factual findings of the Panel, the
facts of this case do not present a situation in which the planting
flexibility limitations demonstrably have “no, or at most minimal,”
trade-distorting effects or effects on production.

Paragraph 6, entitled, “[d]ecoupled income support” applies to
one type of “direct payment” to producers that may benefit from
exemption from reduction commitments and protection under the peace
clause. Paragraph 6(a) sets forth that eligibility for payments under a
decoupled income support programme must be determined by reference to
certain “clearly defined criteria” in a “defined and fixed base
period”. Paragraph 6(b) requires the severing of any link between the amount
of payments under such a programme and the type or volume of
production undertaken by recipients of payments under that programme
in any year after the base period. Paragraphs 6(c) and 6(d) serve to
require that payments are also decoupled from prices and factors
of production employed after the base period. Paragraph 6(e) makes
it clear that “[n]o production shall be required in order to receive … payments”
under a decoupled income support programme.

… the question before us regarding the consistency of production
flexibility contract payments and direct payments with paragraph 6(b) of
Annex 2 is a limited one. It does not concern a measure requiring producers
to grow certain crops in order to receive payments; it also does not
concern a measure with complete planting flexibility that
provides payments without regard whatsoever to the crops that are grown.
Indeed, it does not concern a measure that requires the production of
any crop at all; nor does it involve a measure that totally prohibits
the growing of any crops as a condition for payments. The question
before us in this appeal thus concerns a measure with a partial exclusion
combining planting flexibility and payments with the reduction or
elimination of the payments when the excluded crops are produced, while
providing payments even when no crops are produced at all.

In addressing the question of the consistency of such a measure with
paragraph 6(b), we note that under this provision, for income support to
be decoupled, the “amount of such payments … shall not
be related to … the type or volume of production … undertaken
by the producer in any year after the base period”. …

The ordinary meaning of the term “related to” in paragraph 6(b)
of Annex 2 denotes some degree of relationship or connection between
two things, here the amount of payment, on the one hand, and the type or
volume of production, on the other. It covers a broader set of
connections than “based on”, which term is also used to describe the
relationship between two things covered by paragraph 6(b). Nothing in
the ordinary meaning of the term “related to” suggests that the
connections covered by this expression may not encompass connections of
either a “positive” nature (including directions or requirements to
do something) or a “negative” nature (including prohibitions or
requirements not to do something) or a combination of both. …

Paragraph 6 of Annex 2, entitled “[d]ecoupled income support”,
seeks to decouple or de-link direct payments to producers from various
aspects of their production decisions and thus aims at neutrality in
this regard. Subparagraph (b) decouples the payments from production;
subparagraph (c) decouples payments from prices; and subparagraph (d)
decouples payments from factors of production. Subparagraph (e)
completes the process by making it clear that no production shall be
required in order to receive such payments. Decoupling of payments from
production under paragraph 6(b) can only be ensured if the payments are
not related to, or based upon, either a positive requirement to produce
certain crops or a negative requirement not to produce certain crops or
a combination of both positive and negative requirements on production
of crops.

In contrast to the other subparagraphs of paragraph 6, paragraph 6(e)
does explicitly distinguish between positive and negative production
requirements, because it prohibits positive requirements to produce. The
Panel reasoned that “[i]f paragraph 6(b) could be satisfied by
ensuring that no production was required to receive payments, paragraph
6(e) would be redundant”. We agree with the Panel that the context
provided by paragraph 6(e) indicates that a measure that provided
payments, even if a producer undertook no production at all, would not,
for that reason alone, necessarily comply with paragraph 6(b). This is
because other elements of that measure might still relate the amount of
payments to the type or volume of production, contrary to the
requirement of paragraph 6(b).

The United States seems to argue that the Panel’s interpretation of
the relationship between paragraphs 6(b) and 6(e) would subsume
paragraph 6(e) within the scope of paragraph 6(b), thereby rendering it
redundant. In our view, however, paragraph 6(e) continues to serve a
purpose distinct from that of paragraph 6(b). It highlights a different
aspect of decoupling income support. In prohibiting Members from making
green-box measures contingent on production, paragraph 6(e) implies that
Members are allowed, in principle, to require no production at all.
Accordingly, payments conditioned on a total ban on any production may
qualify as decoupled income support under paragraph 6(e). Even assuming
that payments contingent on a total production ban could be seen to
relate the amount of the payment to the volume of production
within the meaning of paragraph 6(b) — the volume of production being
nil — giving meaning and effect to both paragraphs 6(b) and 6(e)
suggests a reading of paragraph 6(b) that would not disallow a total ban
on any production.

We agree with the Panel that a partial exclusion of some crops from
payments has the potential to channel production towards the production
of crops that remain eligible for payments. In contrast to a total
production ban, the channelling of production that may follow from a
partial exclusion of some crops from payments will have positive production
effects as regards crops eligible for payments. The extent of this will
depend on the scope of the exclusion. …

… Our interpretation of paragraph 6(b) would not prevent a WTO
Member from making illegal the production of certain crops. Nor would it
prevent a Member from providing decoupled income support while at the
same time making the production of certain crops illegal. As Brazil
states, there is nothing in the Agreement on Agriculture to
suggest that the term “production” in paragraph 6 of Annex 2 refers
to anything other than lawful production. In addition, we observe
that specific provisions of the Agreement on Agriculture recognize,
and exempt from reduction commitments, domestic support programmes that
address the problem of production of illicit narcotic crops in
developing countries or payments under certain environmental programmes.

We find further support for our interpretation of paragraph 6(b) in
the context provided by paragraph 11 of Annex 2, entitled “Structural
adjustment assistance provided through investment aids”. Several of
the subparagraphs of paragraph 11 are phrased in similar terms to those
of paragraph 6. Indeed, like paragraph 6(b), paragraph 11(b) requires
that the “amount of … payments … shall not be related
to … the type or volume of production … undertaken by
the producer in any year after the base period”. However, unlike
paragraph 6(b), paragraph 11(b) ends with the phrase “other than as
provided for under criterion (e) below”. Criterion 11(e) specifically
envisages that “payments shall not mandate or in any way designate the
agricultural products to be produced by the recipients except to require
them not to produce a particular product”.

We note that the exception provided by paragraph 11(e) and the link
to paragraph 11(e) in paragraph 11(b) explicitly authorize the
type of “negative” requirements not to produce that the United
States argues is implicitly permitted by the terms of paragraph
6(b). In the light of the similarity of the language chosen in
paragraphs 6(b) and 11(b), like the Panel, we attach significance to the
fact that the drafters saw as necessary an explicit authorization of
negative requirements not to produce under paragraph 11(b). In our view,
this indicates that the ordinary meaning of the terms in paragraph 11(b)
would otherwise exclude an interpretation allowing such negative
requirements. The use of identical language in paragraphs 6(b) and
11(b), except for the reference in paragraph 11(b) to paragraph 11(e),
suggests that the meaning of the terms in paragraph 6(b) must be the
same as in paragraph 11(b). Accordingly, a comparison of these
provisions confirms that the terms of paragraph 6(b) encompass both
positive as well as negative connections between the amount of payments
under a programme and the type of production undertaken.

… The second sentence of paragraph 7 recognizes situations where
subsidies are not provided directly to the agricultural producer, but
rather to an agricultural processor, yet the measures may benefit the
producers of the basic agricultural good. This sentence also clarifies
that only the portion of the subsidy that benefits the producers of the
basic agricultural good, and not the entire amount, shall be included in
a Member’s AMS.

… There is nothing … in the text of paragraph 7 [of Annex 3
of the Agreement on Agriculture] that suggests that such
measures, when they are import substitution subsidies, are exempt from
the prohibition in Article 3.1(b) of the SCM Agreement. …

… paragraph 7 of Annex 3 refers more broadly to measures directed at
agricultural processors that benefit producers of a basic agricultural
product and, contrary to the United States’ assertion, it is not
rendered inutile by the Panel’s interpretation. WTO Members may
still provide subsidies directed at agricultural processors that benefit
producers of a basic agricultural commodity in accordance with the Agreement
on Agriculture, as long as such subsidies do not include an import
substitution component.

… we find that paragraph 7 of Annex 3 and Article 6.3 of the Agreement
on Agriculture do not deal specifically with the same matter as
Article 3.1(b) of the SCM Agreement, that is, subsidies
contingent upon the use of domestic over imported goods.

… the words “production eligible to receive the applied
administered price” in paragraph 8 of Annex 3 have a different meaning
in ordinary usage from “production actually purchased”. The
ordinary meaning of “eligible” is “fit or entitled to be
chosen”. Thus, “production eligible” refers to production that is
“fit or entitled” to be purchased rather than production that was
actually purchased. In establishing its programme for future market
price support, a government is able to define and to limit “eligible”
production. Production actually purchased may often be less than
eligible production.

A.1.36 Relationship between domestic support and export subsidies
disciplines back to top

We believe that it would erode the distinction between the domestic
support and export subsidies disciplines of the Agreement on
Agriculture if WTO-consistent domestic support measures were
automatically characterized as export subsidies because they produced
spill-over economic benefits for export production. Indeed, this is
another reason why we do not agree with the Panel that sales of CEM at
any price below the administered domestic price for milk can be regarded
as “payments” under Article 9.1(c) of the Agreement on
Agriculture. Such a basis for comparison would tend to collapse the
distinction between these two different disciplines.

However, we consider that the distinction between the domestic
support and export subsidies disciplines in the Agreement on
Agriculture would also be eroded if a WTO Member were entitled to
use domestic support, without limit, to provide support for exports of
agricultural products. Broadly stated, domestic support provisions of
that Agreement, coupled with high levels of tariff protection, allow
extensive support to producers, as compared with the limitations imposed
through the export subsidies disciplines. Consequently, if domestic
support could be used, without limit, to provide support for exports, it
would undermine the benefits intended to accrue through a WTO Member’s
export subsidy commitments.

In our view, by relying upon the total cost of production in this
dispute, to determine whether there are “payments”, the integrity of
the two disciplines is best respected. The existence of “payments”
is determined by reference to a standard that focuses upon the
motivations of the independent economic operator who is making the
alleged “payments” — here the producer — and not upon any
government intervention in the marketplace. More importantly, using this
basis for comparison, the potential for WTO Members to export their
agricultural production is preserved, provided that any export-destined
sales by a producer at below the total cost of production are not
financed by virtue of governmental action. The export subsidy
disciplines of the Agreement on Agriculture will also be
maintained without erosion.

… WTO Members are entitled to provide “domestic support”
to agricultural producers within the limits of their domestic subsidy
commitments. We observe, however, that the Appellate Body has also held
that economic effects of WTO consistent domestic support may “spill
over” to benefit export production. Such spill-over effects may arise,
in particular, in circumstances where agricultural products result from
a single line of production that does not distinguish between production
destined for the domestic market and production destined for the export
market.

In this respect, the Appellate Body has cautioned that, “if
domestic support could be used, without limit, to provide support for
exports, it would undermine the benefits intended to accrue through a
WTO Member’s export subsidy commitments”. We believe that these
statements are relevant to the present case. In this case, we note that
C sugar is produced and exported in huge quantities, and that there is a
considerable difference between the world market price and the average
total cost of production of sugar in the European Communities. As we
have noted above, the subsidized production and export of C sugar is not
the incidental effect of the domestic support system, but is a direct
consequence of the EC sugar regime.

We also disagree with the European Communities’ argument that the
Panel’s finding blurs the distinction between domestic support and
export subsidies; we disagree, because the European Communities’
legislation requires the exportation of C sugar, and prices
obtained for C sugar on the world market are significantly be low the
average total cost of production of sugar in the European Communities.
In our view, European Communities’ legislation leaves the sugar
producer wishing to sell C sugar with no choice but to export, short of
the limited option of “carry over”. We also note that the operation
of the EC sugar regime enables sugar producers to cover the fixed costs
of producing sugar and to sell C sugar profitably, even though the
prices obtained for C sugar are significantly below the average total
cost of production of sugar.

Thus, we do not consider that our interpretation erodes the boundary
between “domestic support” and “export subsidies” recognized
under the Agreement on Agriculture. Rather, our interpretation
respects the boundary between the two and operates to ensure that
Members provide domestic support and export subsidies in conformity with
their obligations under the Agreement on Agriculture. As we noted
earlier, our interpretation is based on the specific facts and
circumstances of this dispute.

A.1.37 Relationship between the Agreement on Agriculture and the GATT
1994.See also Tariff Concessions, Relationship between
Member’s Schedules and the Agreement on Agriculture (T.1.4)
back to top

… The relationship between the provisions of the GATT 1994 and of
the Agreement on Agriculture is set out in Article 21.1 of the Agreement
on Agriculture:

The provisions of GATT 1994 and of other Multilateral Trade
Agreements in Annex 1A to the WTO Agreement shall apply subject to the
provisions of this Agreement.

Therefore, the provisions of the GATT 1994, including Article XIII,
apply to market-access commitments concerning agricultural products,
except to the extent that the Agreement on Agriculture contains
specific provisions dealing specifically with the same matter.

… we do not see anything in Article 4.1 to suggest that market
access concessions and commitments made as a result of the Uruguay Round
negotiations on agriculture can be inconsistent with the provisions of
Article XIII of the GATT 1994. … we believe it is significant that
Article 13 of the Agreement on Agriculture does not, by its
terms, prevent dispute settlement actions relating to the consistency of
market access concessions for agricultural products with Article XIII of
the GATT 1994. As we have noted, the negotiators of the Agreement on
Agriculture did not hesitate to specify such limitations elsewhere
in that agreement; had they intended to do so with respect to Article
XIII of the GATT 1994, they could, and presumably would, have done so.
We note further that the Agreement on Agriculture makes no
reference to the Modalities document or to any “common
understanding” among the negotiators of the Agreement on
Agriculture that the market-access commitments for agricultural
products would not be subject to Article XIII of the GATT 1994.

… we examine whether the claimed commitment in Footnote 1 “limiting”
subsidization of exports of sugar can prevail over the provisions of the
Agreement on Agriculture, despite such a commitment being
inconsistent with Articles 3.3 and 9.1 of the Agreement on
Agriculture. …

In any event, we note that Article 21 of the Agreement on
Agriculture provides that: “[t]he provisions of [the] GATT 1994
and of other Multilateral Trade Agreements in Annex 1A to the WTO
Agreement shall apply subject to the provisions of this Agreement.” In
other words, Members explicitly recognized that there may be conflicts
between the Agreement on Agriculture and the GATT 1994, and
explicitly provided, through Article 21, that the Agreement on
Agriculture would prevail to the extent of such conflicts.
Similarly, the General interpretative note to Annex 1A to the WTO
Agreement states that, “[i]n the event of conflict between a
provision of the [GATT 1994] and a provision of another agreement in
Annex 1A …, the provision of the other agreement shall prevail to the
extent of the conflict.” The Agreement on Agriculture is
contained in Annex 1A to the WTO Agreement.

As we noted above, Footnote 1, being part of the European Communities’
Schedule, is an integral part of the GATT 1994 by virtue of Article 3.1
of the Agreement on Agriculture. Therefore, pursuant to Article
21 of the Agreement on Agriculture, the provisions of the Agreement
on Agriculture prevail over Footnote 1. …

As a separate matter, we note that the European Communities asserts
that Footnote 1 was “negotiated” with its partners in the Uruguay
Round negotiations and that it has been “respected”. Accordingly,
Footnote 1 forms part of the treaty ratified by the WTO Members.
Similarly, the ACP Countries allege that Footnote 1 “was negotiated
and agreed upon” or acquiesced in by the Complaining Parties before
the end of the Uruguay Round. The Panel found, however, that “[t]he
evidence and submissions produced by all parties show that the
Complainants did not agree to any European Communities’ deviations
from the Agreement on Agriculture.” The Panel concluded that
“participants in the Uruguay Round and WTO Members did not agree to
the European Communities’ inclusion of Footnote 1 as an agreed
departure from the European Communities’ basic obligations under the Agreement
on Agriculture”. Accordingly, we see no basis in the Panel Reports
for the contention of the European Communities and the ACP Countries
that the Complaining Parties or the WTO Members negotiated or agreed to
Footnote 1 as a departure from the European Communities’ obligations
under the Agreement on Agriculture.

A.1.37A Relationship between the Agreement on Agriculture and the
Modalities Paper back to top

… We note further that the Agreement on Agriculture makes no
reference to the Modalities document or to any “common
understanding” among the negotiators of the Agreement on
Agriculture that the market-access commitments for agricultural
products would not be subject to Article XIII of the GATT 1994.

We do not find it necessary to decide in this appeal on the relevance
of the “Modalities Paper”. The “Modalities Paper” is not an
agreement among the WTO Members and, by its terms, cannot be the basis
of dispute settlement under the Marrakesh Agreement Establishing the
World Trade Organization (the “WTO Agreement”).
Furthermore, as the Appellate Body noted in EC — Bananas III,
“the Agreement on Agriculture makes no reference to the Modalities
document”. …

The introduction to the Modalities Paper states that it is “being
re-issued for the purpose of completing draft Schedules of concession
and commitments in the agricultural negotiations and for facilitating
the verification process leading to the establishment of formal
Schedules to be annexed to the Uruguay Round Protocol”. In our view,
this introductory language and the content of the Modalities Paper make
clear that it qualifies as “preparatory work of the treaty” within
the meaning of Article 32 of the Vienna Convention. The
Modalities Paper explicitly states that it “shall not be used as a
basis for dispute settlement proceedings”; this means that it does not
in itself confer on WTO Members rights and obligations enforceable in
dispute settlement. However, this does not preclude reference to the
Modalities Paper when interpreting the WTO agreements and Members’
Schedules of Concessions that were prepared in accordance with these
modalities. Therefore, we consider that it is not inappropriate to refer
to the Modalities Paper as supplementary means of interpretation to
confirm our interpretation of the European Communities’ Schedule of
Concessions and of the Bananas Framework Agreement.

… Moreover, the Modalities Paper does not envisage temporal
limitations to this commitment resulting from the tariffication process.
However, if the Panel’s interpretation of the European Communities’
Schedule of Concessions were accepted, from 31 December 2002 onwards,
the Schedule would no longer provide for such “current access
opportunities” for bananas to be maintained.

A.1.38 Relationship between the Agreement on Agriculture and the SCM
Agreement.See also Agreement on Agriculture, Article 1(e)
— “subsidy” (A.1.3); SCM Agreement, Article 3.1 — “except as
provided in the Agreement on Agriculture” (S.2.11)
back to top

The relationship between the Agreement on Agriculture and the SCM
Agreement is defined, in part, by Article 3.1 of the SCM
Agreement, which states that certain subsidies are “prohibited”
“[e]xcept as provided in the Agreement on Agriculture”. This clause,
therefore, indicates that the WTO-consistency of an export subsidy for
agricultural products has to be examined, in the first place, under the Agreement
on Agriculture.

This is borne out by Article 13(c)(ii) of the Agreement on
Agriculture, which provides that “export subsidies that conform
fully to the [export subsidy] provisions of Part V” of the Agreement
on Agriculture, “as reflected in each Member’s Schedule, shall
be …exempt from actions based on Article XVI of GATT 1994 or
Articles 3, 5 and 6 of the Subsidies Agreement”.

We agree that Article 21.1 could apply in the three situations
described by the Panel, namely:

… where, for example, the domestic support provisions of the Agreement
on Agriculture would prevail in the event that an explicit carve-out
or exemption from the disciplines in Article 3.1(b) of the SCM
Agreement existed in the text of the Agreement on
Agriculture. Another situation would be where it would be impossible
for a Member to comply with its domestic support obligations under the Agreement
on Agriculture and the Article 3.1(b) prohibition simultaneously.
Another situation might be where there is an explicit authorization in
the text of the Agreement on Agriculture that would authorize a
measure that, in the absence of such an express authorization, would be
prohibited by Article 3.1(b) of the SCM Agreement. [Panel Report, para. 7.1038 (original emphasis)]

The Appellate Body has interpreted Article 21.1 to mean that the
provisions of the GATT 1994 and of other Multilateral Trade Agreements
in Annex 1A apply, “except to the extent that the Agreement on
Agriculture contains specific provisions dealing specifically with
the same matter”. There could be, therefore, situations other than
those identified by the Panel where Article 21.1 of the Agreement on
Agriculture may be applicable.

The key issue before us is whether the Agreement on Agriculture contains
“specific provisions dealing specifically with the same matter” as
Article 3.1(b) of the SCM Agreement, that is, subsidies
contingent upon the use of domestic over imported goods. We, therefore,
turn to the relevant provisions of the Agreement on Agriculture.

Before determining whether Article 6.3 and paragraph 7 of Annex 3 of
the Agreement on Agriculture deal specifically with the same
matter as Article 3.1(b) of the SCM Agreement, we must address
the question whether the Step 2 payments to domestic users of United
States upland cotton fall within paragraph 7 of Annex 3 because the
United States claims that they are “[m]easures directed at
agricultural processors” and “benefit the producers of the basic
agricultural products”. …

We thus turn to the issue raised by the United States’ appeal, that
is, whether Article 6.3 and paragraph 7 of Annex 3 of the Agreement
on Agriculture are “specific provisions dealing specifically with
the same matter” as Article 3.1(b) of the SCM Agreement,
namely, subsidies contingent upon the use of domestic over imported
goods.

… Like the Panel, we do not believe that the scope of paragraph 7 is
limited to measures that have an import substitution component in them.
There could be other measures covered by paragraph 7 of Annex 3 that do
not necessarily have such a component. Indeed, Brazil submits that if
the Step 2 payments were provided to United States processors of cotton,
regardless of the origin of the cotton, these processors “would still
buy at least some U.S. upland cotton, so producers would continue
to derive some benefit”. Thus, paragraph 7 of Annex 3 refers
more broadly to measures directed at agricultural processors that
benefit producers of a basic agricultural product and, contrary to the
United States’ assertion, it is not rendered inutile by the
Panel’s interpretation. WTO Members may still provide subsidies
directed at agricultural processors that benefit producers of a basic
agricultural commodity in accordance with the Agreement on
Agriculture, as long as such subsidies do not include an import
substitution component.

Article 6.3 does not authorize subsidies that are contingent on the
use of domestic over imported goods. It only provides that a WTO Member
shall be considered to be in compliance with its domestic support reduction
commitments if its Current Total AMS does not exceed that Member’s
annual or final bound commitment level specified in its Schedule. It
does not say that compliance with Article 6.3 of the Agreement on
Agriculture insulates the subsidy from the prohibition in Article
3.1(b). …

… we find that paragraph 7 of Annex 3 and Article 6.3 of the Agreement
on Agriculture do not deal specifically with the same matter as
Article 3.1(b) of the SCM Agreement, that is, subsidies
contingent upon the use of domestic over imported goods.

We are mindful that the introductory language of Article 3.1 of the SCM
Agreement clarifies that this provision applies “[e]xcept as
provided in the Agreement on Agriculture”. Furthermore, as the United
States has pointed out, this introductory language applies to both the
export subsidy prohibition in paragraph (a) and to the prohibition on
import substitution subsidies in paragraph (b) of Article 3.1. As we
explained previously, in our review of the provisions of the Agreement
on Agriculture [paragraph 7 of Annex 3 and Article 6.3 of the Agreement
on Agriculture] relied on by the United States, we did not find a
provision that deals specifically with subsidies that have an import
substitution component. By contrast, the prohibition on the provision of
subsidies contingent upon the use of domestic over imported goods in
Article 3.1(b) of the SCM Agreement is explicit and clear.
Because Article 3.1(b) treats subsidies contingent on the use of
domestic over imported products as prohibited subsidies, it would be
expected that the drafters would have included an equally explicit and
clear provision in the Agreement on Agriculture if they had
indeed intended to authorize such prohibited subsidies provided in
connection with agricultural goods. We find no provision in the Agreement
on Agriculture dealing specifically with subsidies contingent upon
the use of domestic over imported agricultural goods.

Our approach in this case is consistent with the Appellate Body’s
approach in EC — Bananas III. In that case, the European
Communities relied on Article 4.1 of the Agreement on Agriculture in
arguing that the market access concessions it made for agricultural
products pursuant to the Agreement on Agriculture prevailed over
Article XIII of the GATT 1994. The Appellate Body, however, found that
“[t]here is nothing in Articles 4.1 or 4.2, or in any other article of
the Agreement on Agriculture, that deals specifically with the
allocation of tariff quotas on agricultural products”. It further
explained that “[i]f the negotiators had intended to permit Members to
act inconsistently with Article XIII of the GATT 1994, they would have
said so explicitly”. The situation before us is similar. We have found
nothing in Article 6.3, paragraph 7 of Annex 3 or anywhere else in the Agreement
on Agriculture that “deals specifically” with subsidies that are
contingent on the use of domestic over imported agricultural products.

We recall that the Agreement on Agriculture and the SCM
Agreement “are both Multilateral Agreements on Trade in
Goods contained in Annex 1A of the Marrakesh Agreement Establishing
the World Trade Organization (the ‘WTO Agreement’), and,
as such, are both ‘integral parts’ of the same treaty, the WTO
Agreement, that are ‘binding on all Members’ ”. Furthermore,
as the Appellate Body has explained, “a treaty interpreter must read
all applicable provisions of a treaty in a way that gives meaning to all
of them, harmoniously”. We agree with the Panel that “Article
3.1(b) of the SCM Agreement can be read together with the Agreement
on Agriculture provisions relating to domestic support in a coherent
and consistent manner which gives full and effective meaning to all of
their terms”.

In previous appeals, the Appellate Body has explained that the
WTO-consistency of an export subsidy for agricultural products has to be
examined, in the first place, under the Agreement on Agriculture;
the examination under the SCM Agreement would follow if
necessary. Turning, then, to the Agreement on Agriculture, we
note that Article 1(e) of that Agreement defines “export subsidies”
as “subsidies contingent upon export performance, including the export
subsidies listed in Article 9 of this Agreement”.

Although an export subsidy granted to agricultural products must be
examined, in the first place, under the Agreement on Agriculture,
we find it appropriate, as has the Appellate Body in previous disputes,
to rely on the SCM Agreement for guidance in interpreting
provisions of the Agreement on Agriculture. Thus, we consider the
export-contingency requirement in Article 1(e) of the Agreement on
Agriculture having regard to that same requirement contained in
Article 3.1(a) of the SCM Agreement.

… According to the United States, “Article 3 of the SCM
Agreement …is subject in its application to Article 21.1 of the Agreement
on Agriculture”. The United States then argues that, because “export
credit guarantees are not subject to the disciplines of export subsidies
for purposes of the Agreement on Agriculture, Article 21.1 of
that Agreement renders Article 3.1(a) of the SCM Agreement inapplicable
to such measures”. …

… Therefore, because it is premised on an incorrect interpretation
of Article 10.2 of the Agreement on Agriculture, we reject the
United States’ argument. …

We agree with the United States that Article 10.3 of the Agreement
on Agriculture does not apply to claims brought under the SCM
Agreement. However, the Panel did not make the error attributed to
it by the United States. The Panel made the statement relied on by the
United States in the context of its assessment of the United States’
export credit guarantee programme under the Agreement on Agriculture.
Although the Panel made use of the criteria set out in item (j) of the
Illustrative List of Export Subsidies annexed to the SCM Agreement (providing
these programmes at premium rates inadequate to cover long-term
operating costs and losses) it did so as contextual guidance for its
analysis under the Agreement on Agriculture, and both the United
States and Brazil appear to have agreed with the appropriateness of this
approach. Thus, the Panel’s reference to Article 10.3 did not relate
to its assessment of the United States’ export credit guarantee
programmes under the SCM Agreement.

Turning to the specific case before us, we note that the Complaining
Parties argue that their claims under the SCM Agreement are
closely related to their claims under the Agreement on Agriculture.
We are not persuaded, however, that Articles 3, 8, and 9.1 of the Agreement
on Agriculture, on the one hand, and Articles 3.1(a), 3.2, and items
(a) and (d) of the Illustrative List of the SCM Agreement, on the
other hand, are “closely related”, because the issues presented
under the two Agreements are different in several respects.

Furthermore, in the instant case, we note that the Panel made
reference to the limited arguments made by the Complaining Parties under
the SCM Agreement: … Although, on appeal, the Complaining
Parties did argue their claims under the SCM Agreement to some
extent, they did not address, in a sufficient manner, the question
whether Article 3 of the SCM Agreement applies to export
subsidies listed in Article 9.1 of the Agreement on Agriculture that
are provided to scheduled agricultural products in excess of a
responding Member’s commitment levels. We believe that, in the light
of Article 21 of the Agreement on Agriculture and the chapeau of
Article 3 of the SCM Agreement, the question of the applicability
of the SCM Agreement to the export subsidies in this dispute
raises a number of complex issues.537 We also consider that, in the
absence of a full exploration of these issues, completing the analysis
might affect the due process rights of the participants.

113. Article 9.1(c) of the Agreement on Agriculture may be contrasted with Article 9.1(e) of the Agreement on Agriculture, as well as with Article 1.1(a)(1)(iv) of the SCM Agreement, and items (c), (d), (j), and (k) of the Illustrative List of Export Subsidies (the “Illustrative List”) of the SCM Agreement. In these provisions, some kind of government mandate, direction, or control is an element of a subsidy provided through a third party.
back to text

280. In particular: (i) the measure at issue does not operate on the
basis of the transaction value of a shipment, but instead
involves a comparison between the lower threshold and a reference
price not directly related to that transaction value; (ii) the
measure at issue does not operate only to bring the entry price of a
shipment up to the level of the lower threshold, but instead
ensures that the entry price of wheat and wheat imports will almost
always exceed the lower band threshold; and (iii) the lower band
thresholds under the measure at issue are fixed as a function of
historical international prices rather than domestic market prices.
back to text

225. Even periodic changes may amount to automatic and continuous
change in circumstances where those changes are frequent enough to
render the resulting duties “inherently variable”.
back to text

777. In this dispute we do not decide whether subsidies paid to
textile manufacturers on their purchases of cotton could be regarded as
measures directed at “agricultural processors” within the meaning of
paragraph 7 of Annex 3. back to text

537. These issues include, for instance, whether the Agreement on
Agriculture contains “specific provisions dealing specifically
with the same matter” (Appellate Body Report, US — Upland Cotton,
paras. 532-533 (quoting Appellate Body Report, EC — Bananas III,
para. 155; and referring to Appellate Body Report, Chile — Price
Band System, para. 186)); whether the SCM Agreement applies
to the subsidy as a whole, or whether it applies to the subsidy only to
the extent that the subsidy exceeds the responding Members’ commitment
levels as specified in its Schedule; and whether, in the event the SCM
Agreement applies, a panel could make a recommendation to withdraw
the subsidy in whole, or whether that recommendation would apply to the
subsidy only to the extent that it exceeds the responding Member’s
commitment levels. back to text

The texts reproduced here do not have the legal standing of the original
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